The Going Public Transaction
A going public transaction occurs when a private company issues it shares to the investing public and subjects itself to reporting requirements and disclosures. The going public transaction takes many forms but is often done through the initial public offering (IPO) process. When a company issues shares to the financial markets without the assistance of an underwriter, the company has engaged in a direct public offering (DPO). A private company may also quickly become a public company by merging itself with an existing public company thus becoming a public company through the reverse merger procedure. A company is often registered to trade publicly by applying for registration with the Securities and Exchange Commission (SEC). The S-1 Registration Statement is the principal document submitted to the SEC for registration of an issuers securities.
Advantages of Being a Publicly Held Corporation and Registering Securities with the SEC
Stock as Currency. After successful registration a private company that has become public may issue new shares and create a public market for its outstanding shares. Once there is a public market for a company's shares, investors may purchase and sell shares more readily. The public quotation of a price allows vendors, employees, and even debt holders to take stock in lieu of cash as payment for services or goods. When a company trade son the public market it receives a higher valuation as a result of its public market status. This same stock may be used as currency for transactions such as mergers or asset purchases.
Acquisitions using newly issued stock. A public company may use its stock to acquire other companies by issuing new stock to use as consideration for the transaction rather than cash. A public corporation exchanges its shares for the shares of the target company at a premium in order to buyout the target company and take control of its assets.
Public Status improves Recruitment and Retention. A company may improve its retention and recruitment of challenging to obtain employees and managers because the public corporation can provide a liquid market for the stock as compensation. Certain fast growing companies such as biotech, pharmaceutical, telecommunication,
The Economics of Capital Raising. It may be a lower cost to utilize an exemption from a registering securities publicly. A company that registers its securities avoids the challenge of negotiating with professional investors such as venture capitalists and can avoid toxic financing or unfavorable convertible debt financing. The registration of a firm opens that firm to public bond markets.
Maintain Control. A company that sells securities to the broader investing public maintains more control than a private company that issues debt or equity to sophisticated professional investors such as venture capitalists and traditional financiers. Venture capitalists often expect a say in future decision making in the company and will push for board seats, require contractual agreements, decide who will serve as management,and determine compensation for employees and the nature of future dividends or distributions, if any.
Improved Access to Capital. Usually a company's balance sheet will improve after a going public transaction. Improved balanced sheets can improve access to capital and reduce borrowing costs. If a company qualifies, an automatic shelf registration can lead to a quick secondary offering for access to additional capital.
Prestige. There is prestige associated with being a major shareholder, director, or officer of a public corporation. There is the recognition of success when a private company becomes a public corporation. The costs associated with filing and maintaining status on a stock exchange provides a floor for the success of firms that are public. The first or primary offering of securities may bring a public corporation issuer $1,000,000 to upwards of $5,000,000.
Disadvantages of Being a Publicly Held Corporation and Registering Securities with the SEC
Disadvantages include costs, disclosures, and more. To learn the disadvantages of going public email us at email@example.com or call (202) 854-8386. We are available 24/7.
The Law Offices of Destiny Aigbe | Securities & Going Public Lawyer
Destiny Aigbe, Securities Attorney
1101 Connecticut Ave NW Suite 450
Washington, DC 20036
Telephone: (202) 854-8386