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What is going public?
Under the Securities Act of 1933, to sell stock to the public, your company
must register with the Securities and Exchange Commission. You file a
registration statement with the SEC and when it is released, you may sell stock
to the public. This stock can trade in the public market and the company then
files under the Securities and Exchange Act of 1934.
Why go public?
- Money -- Not only do you get new money, but you can more
easily raise money in the future -- public companies have an easier
time raising money because the investor has a built-in exit strategy.
Private companies have no built-in exit strategy and the investor's
money is locked in and the investor is therefore reluctant to invest.
- Because you can get a better price for the company -- Some
private companies who want to sell out go public first to get a higher
price
- To help value the company for estate tax purposes - To
provide a market for cashing out
- To attract top employees because you can give incentive stock
options -- Incentive stock options are an inexpensive way to
motivate top employees
- To be able to make acquisitions for stock -- Like
being able to print your own money
- Prestige -- Public companies have a better reputation, are
more widely known
- Financial freedom -- Being public maximizes company options
and opportunities
- Instant Wealth -- nothing beats control of a public company
for increasing your net worth
- Legal Insider Trading -- you can also buy back your stock when it is
underpriced and sell it when it is overprices in the market, subject
to the insider trading rules.
Disadvantages of conventional public offerings
1. Time
The SEC can drag its feet and request seemingly endless
changes in the registration statement. I have seen deals take over a year to get
through the SEC.
I have never seen a company CEO show up for the closing of an
offering without large bags under his eyes. An offering can dominate your time
for as much as a year in the case of a public offering. Imagine enduring endless
meetings with lawyers and accountants, while knowing that all of these
professionals you see before you have their meter running at your expense.
2. Money
| Brace yourself, it
is like buying a house and seeing the long list of costs you are charged. |
|
Hypothetical
Small deal $1 million |
Hypothetical
$10 million deal |
|
Legal
|
1-4% of the amount
raised, for a small deal. |
Up to $40,000 |
Up to
$250,000 |
|
Accounting
|
1-4% of the
amount raised, for a small deal. |
Up to $40,000
|
Up to
$250,000 |
|
Printing
|
This is the big
one. Printing can be more than legal or accounting if you hire a top
financial printer. Small offerings usually do it themselves. |
Up to
$40,000 |
Up to
$250,000 |
|
Advertising
|
Suit
yourself. |
$10,000 |
$50,000 |
|
Mailing, telephone, etc.
|
Figure
closing percentage of prospects contacted, number of prospectuses mailed
out, average purchase of each buyer, etc. |
$5,000 |
$25,000 |
|
Federal fees
|
1/33 of 1% |
$3,333 |
$33,333 |
|
State fees
|
Click
here for table |
|
|
|
The Underwriter
|
An underwriter for
an small, speculative deal can take the equivalent of 15% of the proceeds.
See Negotiating with the Underwriter. |
$150,000 |
$500,000 |
|
Transfer agent, stock certificates, etc.
|
$2,000 + |
$5,000 |
$25,000 |
|
Due diligence and "dog and pony show"
meetings
|
What ever amount
you want to spend |
$5,000 |
$25,000 |
|
Total |
$298,333 |
$958,333 |
|
Total as a % |
29.8% |
9.5% |
Click here to see expenses
on actual IPOs
Click
here to find out your alternatives to going public in an IPO
Note:
The SEC has new rules governing public offerings. See SEC Release No.
33-8591.
To find out what this means to you, contact us.
mailto:lux.investor@gmail.com
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