IPO/Public Company Basics – by Skip Sanzeri

So you are thinking about an IPO for your company?

Well, certainly don’t take this lightly as it is a strategic decision since it encompasses a path that should take a lot of thinking before executing, and also it’s difficult to turn back once it started.

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IPO Pitfalls

What to think about if you are considering an IPO, reverse merger, reverse triangular merger, or reverse takeover:

1. Advisers – Seek out proven, trusted advisers who can help you with this process. Taking a company public is not for the faint of heart, and the amount of resources necessary to get it done should demand that you get the best advice possible. This includes financial, legal, accounting/audit, business, and more. For the companies that we’ve taken public, we’ve always sought out the best possible advisers.

2. Size/state of your company – There are reasons to have a public company and their reasons that you should not take your company public. For larger companies, that have valuations over $100 million, you can look towards some of the large investment banks such as Goldman Sachs or Morgan Stanley. They will give you an assessment as to whether or not you should go public and if they can help. For smaller companies, it’s more difficult as sometimes the decisions aren’t as clear. For instance, you may have a reason to go public that includes the fact that you want to use public markets to bring in capital. Or you may want to use equity to buy another company.

3. Going public costs money – yes, it takes money to make money. Even for a small cap company to go public you should probably have at least $100,000 set aside to cover legal, accounting, and other advisory expenses. In some cases if you have an interesting offering, some of your service providers will take equity in lieu of cash. This will keep your cash burn down. Either way, you have to have enough money to get through the process which can take anywhere from four months to one year, and cost anywhere from $100,000 up to $1 million.

4. Reverse merge or IPO? For smaller companies wanting to fall forward on public markets, you will need to make a decision as to whether or not you go public via a reverse merger (also called a reverse takeover or triangular merger) or to conduct a standard IPO. Reverse merge will require that you find a public vehicle, either in operating company, or a non-operating company that already has a ticker symbol. Make make no mistake, this is a very dangerous area and I would highly advise that you gain significant counsel when looking at buying a company that is already public. Many of these companies are wrought with financial landmines and legal traps that not only could have you losing all of your money, but also you may owe money that you didn’t even know about. Again, find an expert who can help you.

5. What are the steps to going public? Since we are largely talking about the more difficult small cap companies (if you call Goldman Sachs or Morgan Stanley they will take care of most of it for you), here is a list of items to think about:

  • Make your initial decision – IPO or Reverse merger?
  • If a reverse merger, locate a shell company and secure it
  • With either of the above, hire legal counsel first,  and merge your company into the shell, or have an attorney file you S-1 with the securities and exchange commission. Be ready for back-and-forth questions you will need to answer with the SEC. The faster you answer these questions, the more quickly you become a public company.
  • Audits – you will need to find a PCAOB compliant Auditor who will provide audits that are generally within about 90 days of when you intend on going public. So if you have not audited financials for a few years, you will need to get all of that done 1st. Audits can take a lot of time and cost a lot of money. Be sure to give yourself plenty of time for the auditors to finish their work. Additionally the auditors will most likely review the super 8K (see below) and require that they sign off before it is filed.
  • Funds – be sure that you have enough capital available to get through the “going public” process. Between audits, legal, consulting, and other costs, I have seen these run upwards of $500,000. And that does not even include the cost of the shell. So it would be wise to allocate up to $1,000,000 to make sure that you have the funds to get through the process.
  • If you reverse merge you will have to file a super 8K  (sometimes called a Jumbo 8k) with the Securities and Exchange Commission as well.
  • Find someone to help you market the company such as an investor relations firm or small cap IPO expert who can help you understand what the markets will do with your stock.
  • Be aware that once your stock is public, and there is liquid stock available, any number of people in the market can start buying and selling it. You will have no control over this. So it is important that you have a very strong strategic direction to ensure that your company is successful while your shares are being traded.
  • Generally, if you decide to use a reverse merger, or reverse triangular merger, once you sign the merger agreement, at that moment you are a public company.
  • Filing an S-1 – when you reverse merge, you can make the choice to file an S-1 so that all of your founding stock and initial investors are registered, and thus liquid as opposed to waiting for 12 months for SEC rule 144.
  • Again seek out expertise to make sure that your stock doesn’t get decimated by somebody buying large chunks and dumping them.