If your company already has a finished product, sales, and is moving out of the startup phase, and you urgently need to expand (expanding production, product lines, etc.), and your company's growth requires an influx of additional funds, going public (Initial Public Offering) is an opportunity to attract attention and obtain the necessary financing. An IPO, or Initial Public Offering, is an excellent way to gain significant investment by selling shares of the company to private investors.
An IPO means offering the company's shares for sale on one of the public stock exchanges. At the moment this process is completed, the company becomes public, meaning it offers its shares to any private investors who wish to invest in the company through stock market mechanisms.
Besides the ability to increase the company's capitalization through an IPO, there is another positive aspect that arises at the time of selling a public company. It is related to the market valuation of the company and its shares.
How to Evaluate Value?
As a business owner, you are undoubtedly always interested in knowing how much the market will value your company and what price you can quickly and profitably sell your business for if necessary. Let's try to answer this with examples.
To begin with, it’s worth noting that small companies have only 2-3 years to recoup the investments made in them during the startup phase. By the 4th year, a successful enterprise should generate stable income.
Let's consider an example.
A certain private company earns approximately $1,000,000 in one reporting year. If sold, buyers will typically be offered a higher price, ranging from $2,000,000 to $5,000,000. In other words, the amount will be indicated that can be returned within a minimally reasonable time frame of 2-3 years.
Another example.
The manufacturing company "ABC" consistently earns around $3 million a year. This same company goes public, thus obtaining public status. As soon as it announces its public offering, its price immediately rises to 15–18 million. If the shareholders of "ABC" decide to sell, that is, publicly place part of their securities, say, 25% of the shares, then their income will immediately increase to $6,000,000 – $8,000,000. After selling shares on the stock exchange, the shareholders will possess a financial reserve amounting to $13.5 million.
These examples clearly illustrate the difference between the valuations of private and public companies. This difference, amounting to millions of dollars, will also be significant during a sale. Furthermore, selling a private enterprise can take months or years, while a public, transparent, and accountable company can be sold in a much shorter time frame.
Public Company vs. Private Company
Are you considering converting your private company into a public one? Then you need to be aware of the significant differences between these forms of ownership.
First, let’s discuss "private" companies:
- Private companies, which constitute the majority of small and medium-sized enterprises, operate in secrecy, meaning they are not required to provide any reports on their development or financial activities to the general public.
- The main authority to which private owners report is the tax inspection.
- Sources of material resources for company development include loans, profit percentages, and the founders' or investors' own funds.
- Relative financial independence allows founders to determine their development and promotion policies independently.
- Owners, who are already founders, do not share profits or management through the sale of shares.
How do public companies operate? Here, everything looks different:
- The status change from "private" to "public" occurs through the Initial Public Offering procedure, or IPO, which translates to "initial capital placement."
- A public company offers its shares to an unlimited number of individuals on the stock exchange/market. The shares released on the market are quoted as having gone through the listing process, meaning they are allowed to be traded on the exchange.
- Once shares are in the hands of other people, the company becomes "transparent," which defines its accountability to every shareholder.
- A public enterprise also bears responsibility to its shareholders.
- The activities of a public company are controlled by the SEC, or Securities and Exchange Commission, which is a powerful financial regulator.
Thus, by obtaining investments in the form of deposits from private individuals, you, as a founder, lose independence in choosing tactics and strategies for enterprise development, and your company becomes the subject of close scrutiny by both shareholders and the board of directors, as well as the SEC. In this case, a question arises about the advantages of a public company over a private one.
Advantages of IPO
IPO – one of the effective ways to attract financial resources, recognized by experts in the United States. Want to compare it with issuing bonds or taking a loan/credit from a bank? These options are much less profitable and effective. It is IPO that provides a real opportunity to increase capitalization over a short period by raising the market value of the company, increasing share prices, and boosting issuance flows.
As soon as your private company becomes profitable, your shareholders, taking advantage of the priority for returns on their investments, will immediately start extracting all profits from the company, leaving it in a difficult financial position with little chance for growth. Many companies have been ruined and destroyed due to shareholder greed. In the case of an IPO, your shareholders simply sell their shares on the stock exchange and recoup their invested money with high returns. You get rid of the now unnecessary shareholders who could jeopardize the company. Everyone is satisfied. Everyone is in the money.
If the conversation turns to mergers, acquisitions, or sales, then an IPO will serve as a positive marker, helping to carry out the required operations quickly and without financial loss.
Open reporting to shareholders significantly raises the company's authority in the eyes of various financial organizations. This openness serves as a sort of credit of trust for owners in situations when it comes to transactions or seeking additional investments and finances for the business.
The new status of being public is an open gate to financial flows. Such an advantage is impossible for private companies to obtain.
What will you gain as a shareholder of a public company? Profit. Moreover – wealth. And it’s not about years of savings; simply listing shares on the stock exchange for broad sale can provide any shareholder with significant returns and profit. The influx of investments allows both major shareholders – the owners – and ordinary shareholders to earn profits just by holding the company’s securities, compared to which salaries, bonuses, and premiums seem trivial. A good example is the well-known company Microsoft, whose employees became the first shareholders immediately upon being hired, and subsequently became millionaires on IPO day. The first three thousand Microsoft employees became millionaires due to Microsoft stocks they received when they were hired. For the owners and founders of the company, it is worth remembering that shareholders become the most loyal consumers of the company’s goods and services.
How to initiate the IPO process?
Have you heard that it’s practically impossible to break into the American stock market? Forget it! Everything is possible! If you have a successful technology company or experience stable growth in sales of goods or services, but have only a limited amount of free capital in reserve, then obtaining a listing, and therefore the opportunity for successful sale of your shares, is entirely feasible.
To swiftly and without loss enter the market, you need to carry out a series of preparatory activities:
Assemble a highly qualified team.
This team will be responsible for promoting the company and listing securities on the stock exchange. The complexity and duration of the process of issuing shares for sale on the stock market depend on the professionalism and coordination of this team.
The main players are an experienced accountant/auditor and a lawyer who has significant practical experience in this matter. Don’t try to do this on your own. Without the involvement of professionals who are well-versed in all SEC requirements and American laws concerning securities and public company regulations, nothing will go right.
Lawyer. The criteria for selecting a specialist who will bear all responsibility for the legality of capital mobilization, issuance, and sale of securities are as follows:
- Experience working with securities, public companies, and SEC regulators;
- In-depth knowledge of American laws that apply to public companies, securities, and stock exchanges. Laws tend to change, so constant monitoring and the ability to navigate legislation are essential.
Auditor/Accountant. This specialist is responsible for the accuracy of document preparation. When hiring, note that in the U.S., the Sarbanes-Oxley Act imposes restrictions on the number of auditing companies, so your auditor must be a valid member of the association (PCAOB). You will only need to provide full and unrestricted access to all necessary documents for their use.
Regarding payment for professional services, there are two options: hourly payment or a contractual basis. On average, the cost of preparing an S-1 memorandum by a lawyer is between $30,000 and $50,000, while the audit will cost less – around $15,000 to $20,000. The cost of preparing the memorandum is justified by the high level of complexity, precise knowledge of requirements for such documents, and the degree of responsibility for inaccuracies and omissions that can result in lost time and money. On average, the memorandum can be prepared within 60 to 90 days after the company undergoes an audit. Furthermore, the audit may uncover several issues, the resolution of which is essential for listing the company's shares on the exchange. This primarily concerns the company’s documentation and ownership of patents and products.
The primary responsibility of the lawyer lies in preparing the S-1 memorandum, which will enable the company to be listed with the SEC and subsequently gain access to the public sale of shares. The memorandum involves legally accurate preparation of a statement that provides complete and reliable information about the owners, executives, field of activity, financial condition, relations with shareholders, and so forth. In other words, a company ready to go public must become fully transparent to obtain SEC approval. Readiness for an IPO and preparation of the S-1 means that once shares appear on the stock market, there will be a mandatory requirement to provide annual and quarterly reports.
The statement submitted to the SEC regulator includes two parts:
- Prospectus. This section is dedicated to describing all the most important facts about the company, including its current business activities, management system and structure, and financial condition. All potential investors should have access to this information.
- Additional data, which includes numerous items, the quantity and content of which will vary depending on the type of activity and other factors:
- general and detailed information about the enterprise, type of activity, and characteristics;
- data on top management;
- data from the financial activity audit;
- analysis of economic and financial activity for the previous year;
- capitalization assessment;
- description of assets;
- use of funds and expenses;
- income distribution system;
- risk factors;
- history of legal disputes;
- existing contracts with contractors, partners, suppliers;
- characteristics of shares (securities);
- proposed share price;
- dilution price;
- fund distribution program;
- mandatory payments and salary levels for top management;
- possibility of insider and shareholder participation in sales.
If the lawyer and auditor have responsibly and professionally performed their part of the work, the next stage will be registration with the SEC and obtaining a notification of "Effectiveness."
Company Registration with FINRA
In addition to SEC registration, confirmation is also required from another regulator – the financial one – FINRA. At this stage, our company, providing you with various assistance, will leverage the support of the Market Maker team to expedite the process and simplify your life as much as possible.
FINRA, or the Financial Industry Regulatory Authority, is a financial regulator tasked with protecting the financial interests of investors. This organization is characterized by complete independence and total oversight of brokerage exchanges operating in the United States: more than 4,500 companies trading securities and about 640,000 shareholders are under its continuous control. Several hundred regional branches and over 3,000 specialists, 73 operational venues, including in London and Puerto Rico, are available for resolving various disputes – such are the capabilities of the regulator.
How can FINRA personally help you? By providing a broker, efficiently carrying out your investment attraction activities through the sale of securities, avoiding errors and illegal actions in relations with shareholders/investors.
The core of FINRA's activities is based on three main principles:
- Equality and fairness in transactions.
- Establishing control over compliance with fair competition rules.
- Informing and educating potential and existing investors.
The main areas of work for the financial regulator are:
- Monitoring compliance with laws in securities transactions.
- Issuing licenses for brokerage companies.
- Preparing guidelines for brokerage companies operating in the United States.
- Consulting on regulatory policy in the field of investments.
- Training and informing potential and actual shareholders and investors through a system of web resources – its own website, forums.
- Reviewing, investigating, and making decisions on investor complaints.
Stock Exchange Registration
Currently, there are 7 powerful stock markets operating in the country, of which the most accessible and therefore attractive for you is the OTC Bulletin Board, or OTCBB.
The OTC Bulletin Board is an electronic platform that has been in operation since 1988 and is intended for interaction between brokers and dealers. OTCBB is a place where securities are bought and sold, issued both by well-known companies with billions in turnover and by small companies registered in the USA and other countries. The volume of engagement exceeds 20,000 different securities. Thanks to web tools, it is convenient to track quotes and trading volumes in real-time.
The main advantage of the OTCBB exchange compared to others is that it facilitates the sale of securities from companies that, for various reasons, were unable to meet the listing requirements on national exchanges.
Working with this and other exchanges requires your company to be registered, meaning it must be listed, which is only possible under the following conditions:
- a genuinely operational business;
- annual income must exceed $100,000;
- a reserve of 35 or more shareholders/investors;
- reporting and transparency;
All these conditions are achievable even for small companies, provided that registered American companies can only use assets and shares located in the United States, while foreign firms can use assets in any country in the world.
Rules for Working with OTCBB
Starting to work with the exchange should begin with contacting a dealer or broker – they act as intermediaries between the company and the OTCBB. Brokers carry out all transactions with securities, following your instructions.
Moreover, before starting operations, it is necessary to obtain a Ticker symbol from the regulator, which requires filling out Form 211. The ticker, also known as the identifier, represents information about the instruments you are bringing to a specific exchange/electronic system – indices, stocks, bonds. This simple and understandable system for identifying trading participants was devised and developed by Standard & Poor’s, thus establishing the current national standard. The Ticker symbol uniquely and briefly describes the instrument and the company, eliminating the need to constantly mention the full range of information about securities in summaries.
Market makers, also known as brokers and dealers, conduct all transactions with securities, maintain trading reports, input quotes, and do not impose any special requirements, performing numerous other operations while having no business relationships with their issuers.
For companies issuing securities, there are several requirements for listing on OTCBB:
- 3 days are allocated for the listing procedure;
- no fees;
- availability of real-time quotes for internal issues.
To ensure that issuers' operations on OTCBB are not complicated and they always have the right to quote, it is essential to regularly submit financial reports to various regulatory bodies and the SEC.
What does working with the OTCBB provide for public companies:
- Proper and competent organization of operations on the exchange.
- Access to a new level of attracting investments and capitalizing the company.
- Increased popularity and recognition.
Of course, we also work with other exchanges besides OTCBB. However, access to these exchanges is subject to more stringent requirements from the issuers, may cost significantly more, and take longer.
As the turnover and profits of the company grow, it is possible to access other venues. Your listing on OTCBB greatly simplifies this process.
By collaborating with our company, which accompanies every step of the transition to IPO and the start of operations on the exchange, you gain the opportunity to promptly and economically change the company's status, increase its market attractiveness and capitalization, without wasting time or money.