Planning on Going Public? Consider Using a Data Room
Date: 30 August 2016 Share on Twitter Share on Facebook
The moment that a company goes public is a milestone for everyone involved. For the founder, it is proof that they have finally ‘made it’. For investors, it is the promise of a huge payday. And for the public, it is a chance to own their very own piece of a global brand.
But of course, before reaching that coveted stage there is a lot of work to do. Before going public, companies must go through a number of processes including valuation, auditing, board approval, SEC administration, and the most important step of all – finding investors. Once all these criteria have been met, it’s time to look at your options.
There are many ways of going public, but no matter which way you choose, you will likely need a virtual data room for that. And the chances are that there will be an option to suit every type of company. Read on for a guide to the most popular methods…
1. Initial Public Offering (IPO)
This is without a doubt the best known way of taking a company public, but it has fallen out of favor somewhat over the past few years, due to market volatility.
That is also one of the most common cases when documents are uploaded to a data room for due diligence.
IPOs are underwritten by investment banks or big brokerage firms, who guarantee the value of the company after it goes public. However, in order to get the underwriter on board, the company has to undergo a long process of auditing which can take a year or more to complete, and will usually cost several hundred thousand dollars at the very least. Even then, if market conditions take a nosedive ahead of the IPO launch date, the underwriter can still pull out, leaving the IPO in serious jeopardy.
It is a fairly risky means of getting to market, and it is one of the most expensive ways of going public. However, if successful, the company is likely to see an influx of new investment within minutes of the IPO launch.
Best for…large companies or well-managed start-ups which have seen rapid growth.
2. Direct Public Offering (DPO)
Sometimes referred to as the ‘DIY IPO’, this is a cheaper way of going public where the bulk of the work is kept in-house, rather than being outsourced to an investment bank. Many companies start the DPO process as a way of gauging whether or not they have what it takes to launch an IPO, without undergoing a costly evaluation by an investment bank or brokerage. Instead, the company itself becomes the underwriter, and all SEC admin is carried out by the firm’s own accounts team.
Needless to say, this is a labor-intensive process, but for small companies this is preferable to a hefty brokerage bill with no guarantee of results.
Successful DPOs will engage directly with investors and ask them to become shareholders in the business in return for a cash stake. This offers an immediate injection of liquidity, and allows smaller investors to access potentially lucrative stock options with minimum fuss. For this reason, DPOs are popular with small companies, community projects, and non-profit organizations.
Best for…testing the waters before investing a lot of money in an IPO.
3. Reverse mergers
This is a surprisingly popular way of going public, and it can work out to be relatively inexpensive. Reverse mergers happen when a private company merges with a public company which has failed. The private firm essentially acquires a majority share of the public firm’s stock portfolio for an agreed fee – depending on the state of the public company, this can work out fairly cheap. After the merger, the new board will appoint its own senior officials, change the name of the failed firm, and seek new investors.
By opting for a reverse merger, private firms can sidestep some of the arduous administrative processes involved with an IPO or DPO, and save money on brokerage and legal fees. In one simple transaction, a private firm can obtain a public profile, and start courting investors.
However, this is not a risk-free solution. The negotiation process can be fraught with difficulties, especially if the listed company is unwilling to let go. And while it may be possible to get a bargain, some larger companies prefer to target high-value companies with a stronger stock market profile. Recently, Chinese courier firm Yunda Express paid $2.7 billion in a reverse merger with electric company Ningbo Xinhai Electric Co, in return for a plum spot on the Shenzhen Stock Exchange.
Timing may also be an issue, as private firms must wait for the right opportunity to come along on the right stock exchange, and they may still need to raise capital to fund the reverse merger.
Best for…smaller companies with a risk-aware board.
4. Stock registration
Any private company with a valuation of less than $1 million can apply to go public with a stock registration. This is a straightforward process which can usually be carried out in-house. First, an offering is made to private shareholders, then the company can register its stock under the Securities Exchange Act of 1934 . If successful, the company will then be listed on the NASDAQ OTC Bulletin Board , which can be accessed by brokers and independent traders around the world, who can invest in and trade your shares instantly.
For private shareholders, this provides liquidity as well as the opportunity to make a good profit if the stock does well. The entire process will take approximately one year to complete, and this is one of the cheapest ways of taking a company public.
Best for…family businesses or small companies where there is no urgency to go public.