Thursday, June 14, 2012

Why Should Your Company Not Go Public?

I keep thinking about what happened during the Facebook IPO, - the so much anticipated, talked about IPO. For those who have not heard, - here is a great timeline of the events related to the Facebook IPO: The Facebook shares priced at $38 per share, opened at $42, and are now trading at $27.61 (as of the morning of June 14th). The SEC, FINRA, the Commonwealth of Massachusetts, and two congressional panels all announced their intention to review and investigate the IPO and the surrounding activities. Shareholder class action lawsuits are likely to follow soon.

Looking at the Facebook example, I ask this question: is it worth for a company to become public? One obvious major advantage is the ability to raise capital from the public in a relatively short time frame. Public companies may file the so called “shelf registration statement” with the SEC that would enable them to “do take downs off the shelf” (i.e., issue securities pursuant to that registration statement) relatively quickly. There is no need to write extensive disclosures since information about the company is already available to the market through the shelf registration statement and the public periodic reporting documents filed by the company. By being public, a company can now tap into both the public and the private financial markets. Additionally, becoming a public company brings visibility and prestige to the company.

But on the other hand, the cost associated with becoming and being a public company is exorbitant. Typical IPO fees (listing fees and fees paid to advisers) can easily exceed $1 million. Once public, the company becomes subject to reporting obligations under the Securities and Exchange Act of 1934, which means that it has to prepare and file annual, quarterly and current reports with the SEC. Periodic reporting has become an expansive undertaking for many companies that are struggling with high legal and accounting costs associated with being “public”: preparation of reports, attestation requirements, internal controls over financial reporting, etc.

I identify the following two main drivers of IPOs before the JOBS Act. First, the company investors (founders, angels, VCs, private equity funds) needed an exit. Second, the company had more than 500 shareholders, the previous threshold for reporting obligations.

Now, the second reason has been relaxed. As of April 5th, 2012, the 500 shareholder threshold has been raised to 2,000 persons in total or 500 persons who do not qualify as accredited investors (and not counting employees or those shareholders who purchased securities in a crowdfunding transaction).

As to the first reason, as suggested by David Feldman in his blog post, companies should consider avoiding the whole IPO process through alternative strategies (reverse mergers, SPACs, etc.). You can find his blog post here:
So, it seems that the companies can wait a little longer before becoming public or become public companies by avoiding the IPO process.

This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.