1. There is no minimum amount of sales or profit to qualify to become publicly traded in the United States.

2. We do not recommend a reverse merger if it can be avoided. A direct public offering is less expensive and perfectly safe. However, it does take longer to complete a direct public offering than a reverse merger, so if you are in a rush then you might need to consider going public by reverse merger.

3. We can help large companies find an investment banking firm who might be interested in completing a traditional initial public offering. However, if the large underwriters refuse, we can still help even large companies go public in a self underwritten offering.

4. The costs to go public vary based on the method of going public. An IPO can cost well more than $1 million. A reverse merger generally costs more than $500,000 when including the cost of the shell, equity, lawyers, accountants, etc. A direct public offering generally costs between $60,000 to $200,000, depending on the size and complexity of the company. Accounting fees tend to be the largest variable in total cost.

5. There are different benefits of going public for companies that (a) are growing rapidly, (b) stable but profitable or (c) early-stage or start-up. Think of being publicly traded as a tool that can be used as part of your corporate strategy. Financing is generally faster, easier and less expensive; acquisitions are generally faster, easier and involve less dilution; attracting and retaining employees is easier when offering stock options; shareholder liquidity is better when you are quoted. Consider all the advantages and disadvantages.

6. Our fees completely vary with the size, scope and complexity of the transaction. Generally, we charge cash fees starting at $40,000 and share/warrants based on a number of variables. Third party fees such as those for lawyers and accountants are additional expenses.

7. We are interested in working with consultants who can introduce us to private companies in China (and elsewhere) and we offer a generous referral fee.

If you have any additional question, feel free to contact Public Financial Services, LLC by phone or email.

Every company that goes public believes it will grow and increase its share value. Often, companies run into trouble; they can run out of funding, have production problems, distribution problems, management/employee problems, lawsuits, etc. So what happens when a public company goes “out of business”? Good question.

In many cases, these defunct companies maintain their public trading status and become “shell” companies. They generally have no business operations, little if any assets and trade for pennies. Some people think that these companies are worth a lot of money. Why? Because private companies that want to become public can purchase control of the shell in order to become public itself. It works like this: a fictitious HiTech Corp. goes public at $20.00 per share but several months or years later, runs into trouble and then closes down its business.

Although the company no longer has any operating business or any assets, the remaining officers and directors decide to maintain the trading status. The stock continues to trade sporadically at pennies per share. Along comes fictitious Genetic Biotech Corp.

Genetic Biotech Corp. wants to go public but can’t find an underwriter to raise capital for the high risk business, and it doesn’t want to wait the six to nine months it often takes to go public through a Direct Public Offering. Genetic Biotech Corp. needs to raise additional capital, wants to conduct mergers and acquisitions, needs to provide stock option incentives to their employees and wants to provide their existing private placement investors with some liquidity – so they want to go public.

The officers and directors of Genetic Biotech Corp. have heard some benefits of doing a reverse merger with a public shell company. They ask around and find that HiTech Corp. closed down its operations and have a bunch of angry stockholders who originally bought stock in their IPO at $20.00 per share…and it’s now trading for just a few pennies.

HitTech Corp. management knows that their shell company is worth a lot to Gentic Biotech Corp, so they offer to sell majority control of their company. And, it only costs $500,000 plus a few million dollars worth of stock! What a bargain!

The two companies retain lawyers and they consummate a merger transaction whereby the officers, directors and shareholders of Genetic Biotech Corp. take control of HiTech Corp. The remaining officers and directors of HiTech Corp. resign and the Genetic Biotech people take over. After the merger, the public shareholders of HiTech Corp. own stock in Genetic Biotech. The public company’s name is then changed to Genetic Biotech and wholla! Genetic Biotech is now public!

Sounds easy. Is it worth doing? Read our article: Shell Buyers Beware

There’s a better way to take your company public. Contact Public Financial Services, LLC for more information.

The process to go public via initial public offering (IPO) or Direct Public Offering (DPO) follows a prescribed path. While some elements can be handled simultaneously, there are a number of parts that must be done sequentially. As a result, it will often take between six and nine months for a private company to go public.

We have highlighted the major time elements to provide a basic understanding of the process.

1. The financial audit:

Completing the financial audits is perhaps the most time consuming part of the IPO process. The actual timeframe will largely depend on the current state of your financial books and records. If your firm is organized, has internally generated income statements, balance sheets and statements of cash flow – with notations, you should be in pretty good shape. If your books and records are already prepared by a CPA, reviewed by an accounting firm or audited – that is best. Generally, it will take about 30 days for a start-up to be audited, while it can take 60-120+ days for a large operating business to be audited.

2. Preparation of the registration statement:

Preparing the registration statement to be filed with the SEC requires a complete review of all corporate and financial books, records and documents. The better organized companies are able to provide all of the necessary documents upon request. The review itself can take a few days to few weeks. Once complete, the registration statement can be drafted normally within two to eight weeks. Usually, the registration statement is done before the financial audits. Once the financial audits are complete, they are integrated into the registration statement and filed with the SEC.

3. The SEC review process:

Once the registration statement is filed with the Securities and Exchange Commission, the review and comment phase follows a certain path. Generally, the SEC will review the initial filings and will respond with comments in approximately 30 days. At that point, the company and its advisors are responsible for addressing each of the comments. This could take several hours to several days, depending on the nature of the comments. Once the response is completed, a revised registration statement is filed with the SEC. The review and comment process continues until the SEC is satisfied. This normally takes between 60 days and 120 days, but could last materially longer – depending on the company and its advisors.

4. The stock exchange review process:

Each of the stock exchanges have a different review process. Generally, there are no stock exchange concerns if you satisfy all of the SEC requirements. However, the stock exchanges will look at different factors, including the number of shareholders, amount of capital invested and the relationship between and among all shareholders. One of their primary issues is to ensure that no individual or group controls the ‘public-float’. The review and comment process with the stock exchange is similar to that of the SEC. It can last between two weeks and three months, depending on the company and its advisors.

The “Timeframe to Go Public” article is certainly not intended to be an all encompassing review or analysis of all the different steps involved in taking a company public. However, it is intended to provide more detail to the major components.

If handled properly, it should take an average company  between six and nine months to go public via an initial public offering (IPO) or direct public offering (DPO) – if it is coordinated and managed properly.

It is very important to hire knowledgeable, experienced and qualified professional advisors to keep each of the parties involved in a going-public transaction on track and on budget.

For more information about taking your company public, just contact Public Financial Services, LLC.

A description on each follows.

1. The initial public offering (ipo)

An initial public offering is one where an investment banking firm is involved in raising funds for the company going public. Generally, they will also be of value in after-market support and often by providing research coverage. While those are clear advantages, the problem is that the vast majority of companies will not meet the income, asset, revenue or capital requirement standards that many investment banking firms have. As a result, these companies need to opt for one of the other methods to go public.

2. The direct public offering (dpo)

The direct public offering is exactly the same as a traditional initial public offering, except that there is no investment banking firm involved in the process. The advantage is that any legitimate company can go public this way, and their success at becoming public will not depend on an investment banking firm, investor interest or ‘market-conditions’. Plus, this is the least expensive way to go  public!

3. The reverse merger

A reverse merger transaction involves a private company that wants to go public by merging into a company that is already publicly traded. The process simply involves identifying a publicly traded company with little or no operations and entering into a merger agreement with it. Of course, all of the legal and accounting requirements of a traditional IPO or DPO still must be satisfied and within a very short timeframe.

Elsewhere on this website, we have detailed why we do not think it is a good idea for the vast majority of companies to enter into this type of transaction, however, many companies feel it is their best or only option. The advantage: you can go public in a matter of days or weeks. But the disadvantages include the tremendous cash and stock cost, contingent liabilities and more.

Regardless of the path you select, Public Financial Services can help you navigate through each of the steps to ensure a smooth, fast and easy transaction, while minimizing the costs and stress.

Going public via IPO:

The basic steps include:
- engage professional advisors
- organize corporate and financial books and records
- identify most appropriate legal and accounting resources
- complete financial audit
- identify investment banking firm
- complete registration statement
- file with Securities and Exchange Commission
- clear the SEC review and comment process
- complete the public offering
- file with the appropriate stock exchange

Going public via DPO:

The basic steps are virtually identical to those listed in the IPO section. The main differences are that a DPO is a Direct to Public offering, so there is no underwriter or investment banking firm involved in the process. As a result, the company itself is responsible for identifying at least the minimum number of investors that will qualify the shares for trading on a stock exchange.

For more information or a detailed proposal to take your company public, please contact Public Financial Services.

If given the choice between going public through a reverse merger and staying private, there is no question we would opt to stay private. Companies who enter into reverse merger transactions often do so without a complete understanding of the real costs and issues. For example:

1. The cost of the public shell.

Shells are priced with a cash cost and a share cost. Ask around and people will tell you that a “clean shell” (what exactly is a clean shell?) can be purchased for between $500,000 and $750,000. For that amount of money, you should be able to get 95% of the outstanding shares, which means that the shell also cost you 5% of your company.

Let’s examine the 5% owned by the public. These people either had stock in a real company they thought was going somewhere but became defunct and is now a shell – or, they bought stock knowing it was a shell, hoping the company would enter into a reverse merger transaction that would turn the company into something. Either way, the stockholders are the same….they are “sellers”.  They will sell every share they can, at any price they can, regardless of how magical your company is. They don’t know you or your business and they just want as much money as they can get for their shares.

So do the shares they hold constitute a “cost” in a reverse merger with a shell? Let’s assume your company trades at a $10 million valuation. The 5% you left the public shell stockholders with is worth $500,000. If it is not stock you kept, it is a cost. But it gets worse.

Since we know those stockholders are sellers and will take every opportunity to sell anything they can, your stock price will probably not increase until those people have sold all their shares. In fact, regardless of what you think about your company, your stock price might drop like a rock because those shareholders may own their stock at little or no cost, so any price they get is pure profit.

If you had any plans to acquire another business or raise investment capital, how interested do you think people will be if they see your stock falling? So, most companies who enter into a reverse merger end up spending a significant amount of time and money to attract buyers just to absorb the 5%+ owned by the shell stockholders. Why would any company subject themselves to this problem when they understand that this problem is virtually non-existent in a direct public offering?

2. The cost of reverse merger compliance.

Within a few days of consummating a reverse merger, you will need to provide the Securities and Exchange Commission with audited financial statements and a disclosure statement that contains all of the information required in a full-blown registration statement.

In the past, companies could enter into a reverse merger and could file minimal disclosures weeks later. No longer. The information required is now far more extensive and is required immediately. The days of a fast or easy reverse merger are over. If you have to spend the time and money to obtain audited financial statements and a full-blown registration statement, why go through the expense of a reverse merger when you can do a direct public offering instead?

3. The cost of contingent liabilities in public shells.

Most private companies seeking a reverse merger will thoroughly review the public shells financial statements. They need to pay special attention to the section titled “Contingent Liabilities”. Many of you know this…there is no such section. However, there is such risk.

A contingent liability generally stems from the actions or perhaps the lack of action that a company took in the past, but which can not be quantified by traditional financial statements or numbers.

For example, a shell company that previously sold toothpaste could ultimately be sued by a customer who bought one tube three years ago and claims that their cancer was a direct result of manufacturer defect. Why should you care? Because after the reverse merger, “you” are that same company!  Not only will you have to deal with the lawsuit, but are also responsible for the verdict and any damages!

It is often better to remain as a private company than to enter into a reverse merger transaction. However, if you have read this Q&A and still proceed with a reverse merger, we would love to hear how the transaction concluded. Please drop us an email three or six months after the closing to let us know if you would do it again.

We suspect we already know the answer, but would love to hear any examples of success (or failure).

Contact Public Financial Services if you need help going public.

The benefits of an initial public offering are numerous.  In addition to the financial gains, a company that decides to go public will also increase their public awareness and credibility.

Since public companies are more carefully and closely monitored than private companies, many investors feel that that they make for more stable investments.  This increased demand is reflected in a higher overall valuation of the company.  In addition, media outlets are generally more willing to cover public companies, so publicity generally increases.

Going public also increases the liquidity of company shares, further increasing the value of the company.  At the initial public offering, a market is created for the company’s shares, allowing investors to trade freely.  That freedom to sell as necessary lowers the risk involved in holding shares, thereby increasing value.

For a company that has difficulties attracting and retaining quality employees, going public can offer another form of compensation.  While shares of a company can certainly be offered as compensation by private companies, they are even more valuable when they have the liquidity and stability that comes with going public.   In addition to increasing morale, stock options help to align the incentives of employees to those of the company.

The owner of the business may enjoy similar benefits after going public.  His or her shares immediately take on a liquid, easily calculated value.  While there are restrictions on when those shares may be traded, the overall value of the owner’s percentage should increase after the initial public offering.  In fact, many business owners decide to go public as an exit strategy.  Once the company is public and shares can be sold, it becomes much easier to remove oneself from ownership.

For all the benefits of an initial public offering, the process is not without its drawbacks.  Those who enjoy the autonomy of owning a private company may not enjoy having to answer to shareholders after going public.  Instead of acting purely in the interest of the company’s long-term well-being, management may feel pressured to take actions to maximize immediate returns.

Lack of control doesn’t end with management decisions.  The decision to go public can also leave a company vulnerable to hostile takeover if insiders don’t retain a sufficient percentage of outstanding shares.  Although extremely rare to occur, for that reason, some companies choose to restrict the number of shares issued.  While this is effective, it also limits the total capital raised.  As an alternative, other corporations issue shares with voting restrictions.  These restricted shares are valued less than unrestricted shares, so this scenario also raises a smaller amount of capital.

Even before the initial public offering is complete, it can have some negative effects on the corporation.  The process of going public is both time-consuming and expensive, and can divert employees from day-to-day activities.  It’s not unusual for underwriting fees and related expenses to cost 10-20% or more of the total funds generated by the offering.

After the initial public offering takes place, higher expenses continue in the form of increased reporting requirements.  Taxes become more complicated, required disclosures increase, and the company becomes subject to a host of SEC requirements regarding activity of the company and its executives.

While an initial public offering isn’t right for every company, the decision to go public is certainly appropriate for many.  If a corporation can shoulder the burdens of additional expenses and profit-driven stockholders, it’s certainly an option worth pursuing.  The major influx of cash that going public can provide might be just what it takes to bring a company to the next level.

Many companies opt to go public through a direct public offering. In these registered public offerings, a private company follows the same rules and regulations that are followed by companies who go public with an investment banking firm.

√ You do not need to go public through a reverse merger.

Many companies falsely believe that they are too small or are not interesting enough to go public so they decide to go public through a reverse merger transaction. The truth is that virtually any company can go public through a direct public offering.

√ You do not need to give up control of your company.

Senior executives of small to medium size companies believe that they will lose control of their company during the process to become public. While there are additional constraints due to government regulations and investor demands, it is rare for a company to give up control. When companies do give up control during the initial public offering process, they always do so voluntarily as they have a choice not to proceed with the transaction.

√ You can provide yourself and your investors with an exit strategy and liquidity.

Companies go public for many reasons. One of the benefits of being public includes the fact that insiders and their investors can liquidate their holdings over time.

√ You can use newly issued stock to acquire other companies and grow your business.

Many companies want to go public because they understand that issuing stock to acquire other companies is a tremendous advantage. What private company would not be interested in hearing an offer from a publicly traded company?

√ You can generally raise capital easier, faster and at a lower cost after going public.

Investors have a natural preference to invest in publicly traded companies. As a result, they are more willing to invest in publicly traded companies.

√ You can significantly increase your personal wealth by going public.

Going public is a great way to generate immense wealth. Private companies are often valued at far less than their publicly traded counterparts. The mere process of becoming public adds enormous value to the shares of any private business.

√ You can issue stock options to attract and retain high quality employees and consultants.

Smart and talented people are always hard to get. Public companies can effectively use stock options as a nice incentive that their private companies can not offer.

√ You do not need any minimum level of sales, profits or assets to become public.

Many private companies think they need to achieve certain milestones to become publicly traded. The fact is: there are absolutely no sales, profit or asset requirements for a private company to go public.

Even before a corporation actually goes public, the costs are high.  It’s not uncommon for a company to spend a year beforehand just to get the company in shape and gather necessary documents.  Day-to-day activities become difficult as employees struggle to perform preparation work and their normal duties.  Since investors want to see a company in excellent financial health, every aspect of the corporation must be examined in advance.  If a company decides to go public and the offering is unsuccessful, it loses legal and underwriting expenses in addition to the lost capital.

For many business owners, the biggest costs of going public are personal losses.  Privacy vanishes in a flurry of disclosure requirements, allowing investors, competition, and the general public to peer into previously confidential details of the company.  Cost of sales, net income, major customers, and management salaries become available to anyone who cares to look.  In some cases, these disclosures could give a substantial competitive advantage to competitors, especially those that haven’t yet taken the step of going public.

Those disclosures can also mean huge expenses after a company decides to go public.  Quarterly and annual SEC filings are required, and regular tax preparation becomes more complicated than before.  Additional legal and accounting staff may be necessary to keep up.

When a company decides to go public, decision-making privileges are quick to go.  Instead of making instinctual, unilateral decisions, shareholders must be considered and it may be necessary to consult with the board of directors.  The kind of decision-making that made the company successful can give way to actions borne out the desire to minimize immediate risk and maximize shareholder revenue.  Unhappy shareholders can drive down the company’s value, damaging employee morale, personal wealth, and company reputation.

If insiders of a company fail to hold onto a majority of the corporation’s shares, the loss of control can be even greater.  While this can be mitigated by limiting the number of shares made available, it’s a costly option to a company that is attempting to raise money.  Some corporations going public prefer to offer voting-restricted shares.  Such restrictions reduce raised capital in a more subtle way.  Investors pay less for shares with fewer privileges, so the total funds raised are lower, even though a large number of shares is being offered.

Despite the drawbacks, many corporations find that going public is the most effective way to expand a business quickly without the use of traditional debt financing.  For those that have carefully considered the positives and negatives, the transition can be smooth and prosperous for everyone involved.

The costs to go public via initial public offering (IPO) or Direct Public Offering (DPO) varies substantially with the type of company, size and complexity. Generally, it can cost as low as $60,000 to go public.

We have highlighted the major cost elements to provide a basic understanding.

1. The accounting fees:
The financial audits can cost from as little as $2,500 for a complete start-up to $35,000 for a fairly simple business that is generating a few million in sales, to hundreds of thousands of dollars for larger and more complex businesses.

2. The legal fees:
The legal fees can cost from as little as $25,000 for a complete start-up to $45,000 for a fairly simple business that is generating a few million in sales, to $150,000+ for larger and more complex businesses.

3. The miscellaneous fees:
The miscellaneous fees include various items that are required to be paid for as part of the going public process. Generally, these range from $7,000 on the low end to $15,000 on the high end.

4. Professional advisor fees:
Professional advisor fees are generally structured as part cash and part equity. These fees vary based on the size, scope and complexity of the business going public.

Please contact Public Financial Services, LLC for a detailed proposal.