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The Advantages and Disadvantages of Going Public

"Going public" is an expensive process and a public company faces many new responsibilities it did not have as a privately held business. While there are benefits to going public, the owners of a business should seriously consider all the options and potential new responsibilities and obligations in order to make an informed decision that is in the best interest of their business. A securities attorney can help you analyze the advantages and disadvantages of an initial public offering (IPO).

What is "Going Public," and is it Right for Your Company?

When a company registers securities so that it can offer and sell them, the company's status shifts from privately held to public. Most companies that opt to go public do so to raise money; however, a private company with successful operations has other alternatives for raising money. For example, the company could obtain private financing from a venture capital group through a Regulation D offering to accredited investors. Another alternative is for the business to be financed through a joint venture with an established company. It is important for a business to consider its growth potential and the advantages and disadvantages of going public before deciding how to proceed.

Advantages of Public Offerings

Going public will result in increased capital for the issuer. A public offering places a value on your company's stock and insiders who retain stock may be able to sell their shares or use them as collateral. Going public also creates a type of currency in the form of its stock that the business can use to make acquisitions. In addition, the company will likely have access to capital markets for future financing needs. Generally, a company's debt-to-equity ratio improves after an initial public offering, which means that the company may be able to obtain more favorable loan terms from lenders.

By offering securities publicly, the company and its management may be able to retain a certain degree of control. If a privately held company decided to sell common stock to venture capitalists to raise money rather than doing an initial public offering, the purchasers would generally require some decision-making authority. For example, the venture capitalist may require that a person of its choosing be put on the board of directors. With a public offering, these sorts of obligations are avoided.

For some individuals, the prestige associated with public companies or being a director or officer of a public company has a certain allure. In addition, going public will generally result in the ability to better promote the company. Publicly traded businesses are usually better known than non-publicly traded businesses. The company can gain publicity and an image of stability by trading publicly.

Along with prestige and the ability to better promote the company, going public may allow the company to attract better personnel, including high-level executives and officers. Public companies are able to offer stock options, which have the potential to substantially increase in value.

Disadvantages

There are a number of reasons why a company may opt not to go public, especially if it has another way to raise capital. Going public is an expensive process (costs can range from $250,000 to $1 million), and if the offering does not go through, the company will lose that money. Typical expenses associated with a public offering include legal and accounting fees, filing fees, travel costs, printing costs and underwriter's expense allowance. Going public can also be an extremely difficult process, especially if the business and its management are not familiar with the registration process. The company will need to put all its business affairs in order and the day-to-day business operations will likely be disrupted.

Another disadvantage of going public is that public companies operate under close scrutiny. The prospectus reveals substantial information about the company including transactions with management, executive compensation and prior violations of securities laws. This may be information the company would rather not reveal. In addition, the decision-making process must become more formal and less flexible when there are shareholders. This may be hardest for companies that previously were run by a small number of individuals who made decisions as they wished.

Public companies must comply with reporting requirements under the Exchange Act of 1934 as soon as the registration statement becomes effective. Complying with these reporting requirements can be expensive.

There is also an increased risk of exposure to civil liability for public companies, executives and directors for false or misleading statements in the registration statement. In addition, officers may face liability for misrepresentations in reports filed with the SEC, for disclosing false information about the company or for insider trading.

There is a new pressure on public companies to increase earnings. Even successful businesses will face this pressure as shareholders become extremely focused on the company's current earnings. Because shareholders are often only investing for the short term, they want to see quick, steep rises in the stock's price so they can sell their shares for a profit. Thus, there is tremendous pressure to increase current earnings.

Public companies are also at risk of takeover attempts. It is generally advisable for the company to implement certain anti-takeover measures such as a staggered board of directors.

Conclusion

Any business that is considering going public must know the advantages and disadvantages of such a decision. Those listed above are only some of the relevant considerations. An attorney with experience in securities law can assist you with analyzing these considerations and making a decision that suits your company.

Copyright 2014 FindLaw, a Thomson Reuters business

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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