When Can a Company Go Public: Everything You Need to Know
When can a company go public? A company is ready to go public when it is prepared to make an initial public offering of stock.4 min read
When can a company go public? A company is ready to go public when it is prepared to make an initial public offering of stock. To do this, start-ups and small companies must prove the potential to grow into a profitable business. Larger organizations must show an ability to create profits and grow market share.
Why Go Public?
Going public allows a company to access certain benefits, including increased capital and broader name recognition. As a company gets bigger and more stable, new investors come along and financing special projects gets easier. Companies go public because of:
- Cash: The most obvious benefit of going public is the availability of more money to grow the company.
- Stock options: Stock is a form of currency that can be bought and sold in the public exchanges. The cash coming in from this can be used to grow your company or to buy other businesses.
- Easier operations: Conducting business is easier in a public company. Anyone looking to find documentation your company has filed can get it from the Securities and Exchange Commission (SEC).
- An exit strategy: Venture capitalists may set up a new company and then take it public to generate revenue. The initial public offering then becomes an exit strategy.
What Is Involved in Going Public?
Taking a company public involves an initial public offering (IPO) of stocks, meaning privately held shares are offered to the public. Those shares are then traded on a recognized stock exchange. This is an expensive process that requires the company to comply with securities law. Going public requires:
- Capital: Up to 25 percent of the equity in the business can go toward public purchases and the associated fees.
- Giving up some flexibility: After the initial offering, the management team of the organization has less flexibility. The company must comply with strict guidelines on reporting to shareholders, especially where voting rights are concerned.
- Reporting compliance: Public companies must register with the Securities and Exchange Commission and compliance with the Securities Exchange Act. This act requires the disclosure of all the facts that could influence an investor's decision to buy stock in a company. The SEC requires specific financial statements quarterly and annually. Other legal requirements apply to material transactions and trading of stocks by executives and board members.
- Public disclosures: The Exchange Act requires public disclosures related to management, financial health, and day-to-day operations. This is usually done via quarterly or annual reporting. This information must be provided to the SEC as well.
- A commitment of time: Building up to the IPO, the senior members of the team will spend many hours traveling, building contacts, and contacting possible investors. This takes time away from daily operating tasks.
How Does a Company Go Public?
When a company chooses to go public, it can choose from four avenues of doing so.
- Initial public offering: An IPO is the most well-known way for a company to go public. In some time periods, very few IPOs are issued. Large brokerage firms underwrite these IPOs and often guarantee the company capitalization. Very few full-service brokerage firms are still in existence. Only the largest ones are capable of handling an IPO.
- Reverse mergers: This is the most common way for a company to go public. A reverse merger happens when a private company merges with a trading company that failed as a business. The company still trades but may have very few business transactions. It is sold to a new company, often with a large "reverse" in issued shares. This is a comparably inexpensive way to go public - $200,000 to $300,000, but it is risky.
- Merger with a "virgin shell:" This method is growing in popularity. The vessel into which an operating business is merged usually has few shares issued, making it easier to maintain a controlling interest. The price of a fully reporting, trading, virgin shell is about $400,000. More than 90 percent of the stock is deliverable. The price of a virgin shell with SEC approval is $65,000 to $100,000.
These companies are specifically designed for a merging operational company. Once it is audited and merged, final trading approval can be completed quickly. The approval comes from the Financial Industry Regulatory Authority (FINRA), which is connected to the National Association of Securities Dealers (NASDAQ).
- The long way: A private company can issue an offering followed by a stock registration. Then it can file to trade. This usually takes about a year, but it is less expensive than other methods, usually between $50,000 and $100,000.
If you need help with determining when a company can go public, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.