IPO on the Cheap?
This is a guest post by Jurgita Ashley
You are a small company ready to take a leap into the public market, whether it is for growth, liquidity or to attract greater investor interest. But, oh man, those dollar figures for IPOs would make anyone’s head spin. But wait, don’t discount it yet as a viable alternative. If done right, going public does not have to cost a fortune. Small companies can take advantage of the SEC’s relaxed reporting regime, may strategically decide to list on the Bulletin Board (the OTCBB) rather than the NYSE or NASDAQ, and can significantly limit their corporate governance-related expenses.
Your first major—and unavoidable—expense will be the preparation of a registration statement. Inevitably, it will require management’s time, preparation of audited financials and legal fees. You do not have to be charged, however, $1,000 per hour or other exorbitant fees, and your IPO team does not have to include 50 professionals. If you are a “smaller reporting company,” which is a company with a public non-affiliate common equity float of less than $75 million (or annual revenue of less than $50 million if the float cannot be calculated), your reporting requirements will be limited. Your registration statement – whether it is on a Form S-1 (involving an immediate capital raise) or a Form 10 (initial registration with the SEC to position the company for a subsequent capital raise) – will include less financial information and disclosures than is required for larger companies. In addition, this first registration statement is the “meat and bones,” so your subsequent filings will build upon this information and will involve much less drafting from scratch. This first registration statement will most likely be reviewed by the SEC, which will issue comments requiring one or more amendments. This review, however, will most likely be limited. With the Dodd-Frank and other legislative initiatives and demands on the SEC’s resources, the days of 100 plus comments are largely over. As long as your accounting is in order and your legal advice is good, you should be able to maneuver through the SEC’s comment process without excessive delays or expense.
Now, let’s say your primary goal is to obtain greater investor interest in the company and to create an avenue to sell stock. To achieve this, it is not necessary to pay the NYSE’s or NASDAQ’s listing fees or to become subject to their reporting and governance requirements. Although the OTCBB is usually not the market of first choice, it can be an effective vehicle to provide some liquidity and disseminate information about the company. To list on the OTCBB, a company only needs a market maker and to file reports with the SEC. By listing on the OTCBB, the company becomes subject to the oversight of FINRA, but there are no listing fees, no additional reporting requirements, and no special governance requirements. In addition, if down the road you are ready to transition to the NYSE or the NASDAQ, your platform will already be in place.
As a company that is listed on the OTCBB only, you are subject to limited corporate governance requirements (imposed by the SEC). Yes, some of your directors should be independent, committees should operate under board-approved charters and the company should have a code of ethics and reasonable internal controls, but all of these policies and procedures need not become all consuming. There is no need for a small company with limited financial resources to adopt all the latest “best practices” in governance or add a whole department to address the company’s new reporting obligations. Pursuant to recent SEC relief, “smaller reporting companies” also do not need to obtain—and pay for—an auditor’s report on internal control over financial reporting. Reasonable disclosure controls and procedures are important and, in some instances, improving the company’s policies and procedures is desirable and appropriate. In many cases, however, most new obligations of a small public company can be satisfied without exorbitant expense.
Nearly 50 percent of all public companies in the United States are “smaller reporting companies.”(1) Of course, not every small private company will find it desirable to go public, and for some, a full-blown—and expensive—IPO is an appropriate option. The perceived costs, however, should not discourage other companies from evaluating the option of a lower cost IPO. Access to the public markets is no longer insurmountable.
Jurgita Ashley is an attorney in the Cleveland, Ohio office of Thompson Hine LLP and is a member of its Corporate Transactions and Securities practice group. Her practice is focused on public company matters, primarily securities law, corporate governance and takeover matters. She can be reached at [email protected] or through www.ThompsonHine.com. The views expressed in this article are attributable to the author and do not necessarily reflect the views of Thompson Hine LLP or its clients. The author would like to thank Derek D. Bork, a partner at Thompson Hine LLP, for his review and invaluable input on this article.
(1) Forty-eight percent of all U.S. companies filing annual reports on Form 10-K with the SEC were “smaller reporting companies” for the period from October 1, 2009 through September 30, 2010, which is the SEC’s latest fiscal year for which data is available. Proxy Disclosure Blog by Mark Borges at CompensationStandards.com (December 3, 2010), available at www.compensationstandards.com.