The management offers shares of stock in the company to the public. This may seem unusual for a company in trouble, but there are companies in the technology field who can put a new spin on the direction of the company and be able to tap into the public markets. For example, one of my business associates was running a CD-ROM game company, but the company had a difficult time selling its games because of the large amount of marketing dollars required to buy retail store shelf space.
My associate refocused the company to allow users to play the games for free on the Internet. He then sold sponsorships to underwrite each game and took a percentage of new sales companies who sponsored the games made off of the users of his web site. He used the money to market the site to Fortune 1000 companies and hired a top-flight public relations firm to promote the new site.
How It Works: Contact an investment bank, a legal firm and/or accounting firm that specializes in taking companies public. An investment banker, accountant and securities lawyer can walk you through the process of developing a prospectus, which covers the company's vision, strengths, weaknesses and risks. You can find approved investment banking firms by contacting the Securities and Exchange Commission in Washington, D.C., and the National Association of Broker Dealers in New York City.
Following is a summary of the minimal financial requirements for a public listing initial listing:
- $4 Million in Total Assets
- $2 Million in Total Stockholders' Equity
- A public float of 100,000 shares
- A $1 Million market Value for the public float 300 Shareholders
- A $3 minimum bid price
- At least two Market Makers
Although the following may seem to technical, this will give management an idea of what a company needs to do to remain a public company.
- $2 Million in Total Assets
- $1 Million in Total Stockholders' Equity
- A public float of 100,000 shares
- A $200,000 Market Value for the public float
- 300 Shareholders
- A $1 minimum bid price
- At least two Market Makers
- Registration under Section 12(g) of the Securities Exchange Act of 1934 or equivalent
If the $1 minimum bid price requirement is not met, the issuer can still continue to qualify if the value of the public float is at least $1 million and capital and surplus is at least $2 million.
Preparation Expectations: Previously, we mentioned that there are three main types of professionals you contact when interested in going public: accountants, lawyers and investment bankers. In addition, management needs the services of a financial printer, as well as a public relations firm that handles or specializes in public companies. Below are descriptions of what each group does in the process.
Certified Public Accountant. Depending upon the type of offering, the company's books will need to be audited for the prior two to five years.
Law Firm. To guide management through the maze of state laws and federal (SEC) regulations, an experienced securities lawyer will be required.
Public Relations Firm. To promote your IPO (initial public offering), management will need a public relations firm.
Financial Printer. Launching an IPO requires communication with shareholders, and the most widely used media is paper. While a public relations firm may be able to help in writing this material, it will have to be printed and then distributed.
Management could decide to launch the company's IPO through the World Wide Web (described in the next subsection), in which case some of the expenses associated with printing might be reduced. In addition, management could use the Internet for communicating with company advisors and as a public relations vehicle.
Of course, once the company has gone public, there are a variety of ongoing expenses such as:
- Hosting quarterly stockholders' meetings.
- Producing quarterly and annual reports.
- Hiring accounts to review the financial records and offer an opinion on the accuracy of the records and the financial health of the business.
- Providing information to the media and stockholders.
If an IPO is cancelled because of adverse market conditions, those costs associated with becoming public cannot be recouped. One cost the company would not have to bear is the underwriting. Traditionally, the underwriter of an IPO takes a percentage (say 10%) of the offering. This percentage is the underwriter's payoff for providing their service. If there is no offering, then the underwriter receives nothing.
Advantages: A lot of money can be raised at one time. Also, people like to do business with companies that are public because they perceive them to be successful.
Disadvantages: There are a lot of financial and legal reporting requirements to various government agencies. Unhappy shareholders can sue the company, its officers and directors if they disagree with the way the company is being run. The cost of going public is minimally $100,000. There is constant pressure to increase revenues and profits each quarter. P> How To Keep Them Happy: Stay focused on increasing revenue and profits, and keep your shareholders informed of the company's mission and goals. Shareholders can be a great advocate for a company.
Internet Address: www.sec.com, www.nasd.com, and www.nasdaq.com These three sites provide information on what the legal requirements are to go public, for a company to maintain its public status and what broker/dealers are being investigated or disciplined. They also provide information on new ways to raise money through the public market.