No two businesses have the same customers, partners, culture or financing needs. Luckily, differences in financing options can be creatively crafted to match the needs of different companies in dispersed industries. In many cases, the financing gap in business is often left unfilled, not because options don’t exist, but because management and individual business owners are not privy in understanding where to turn for assistance. Nowhere is this need more pressing than in the market for public offerings.
Among the most pressing demands to take your company public are capital raising and investor liquidity. Other motivations certainly exist, but none are typically more driving in any public offering scenario. Understanding the differences in the options for various public offerings– including the time required to complete and the capital costs incurred throughout the process–is extremely helpful in understanding which direction might fit the differing needs of various businesses. What follows is a brief explanation of some of the most prevalent public offering scenarios, including their associated cost and time to market.
Initial Public Offerings
Traditional IPOs are the “Jell-O” brand of public offerings. It’s the method everyone is familiar with when companies speak of taking private companies public. In the typical upper-market IPO a large private firm will solicit the business assistance of large accounting firm to prepare them with all the documentation needed to submit an S-1 to the SEC. The company will them go through the iterative commenting process needed prior to getting approval for the share registration. After SEC approval, the underwriting investment bank will put on a roadshow in multiple cities, seeking to garner widespread institutional investor interest in the offering. In this “dog and pony show,” the bankers will tout the upside potential of putting investment into the initial public offering. In typical fashion, the company will keep an open window for the IPO, hoping to solidify it’s launch at a time that makes the most sense for getting the best “pop” on the share price.
True to form on typical IPOs, the underwriting investment bank will help to create artificial demand, at least in the beginning, for the stock being bought and sold once the opening bell rings. This artificial propping of the stock helps to ensure the bankers’ clients maintain stability in the stock price, giving the overall market an assurance that the business is fit for long-standing presence on a major national exchange like the NYSE or NASDAQ.
The cost of a typical IPO process can be anywhere from $500,000 to $1,000,000, depending on the firm in which you’ve decided to engage. It can also take a year or more before that initial IPO bell rings. While this method remains the most well-known, it isn’t cost or speed friendly to most firms needing public market access for liquidity or capital-raising needs.
Alternative Public Offerings
The typical Alternative Public Offering (APO) combines the financing power of a PIPE (Private Investment in Public Equity) with the “go public” option of a reverse merger. The two are consummated simultaneously resulting in a completed shell funded with monies from the corresponding private placement. Such deals a great for providing a buyout vehicle for private companies or simply provide a method for the PIPE investors to put capital to work and obtain a quick return once a reverse merger is completed.
In most traditional reverse merger deals a public shell company is used as a vehicle for a private company to reverse merge in and take over as the new operator of the public shell. APO offerings differ in a couple of ways. First, in an APO scenario, the public shell is often a manufactured vehicle or entity whose primary objective is to provide a holding for the PIPE investors’ cash and a public market for the target company’s business. These manufactured vehicles are much cleaner than many of their traditional shell counterparts. Some shells have skeletons in the closet that can take tens of thousands of attorney dollars in processing a proper clean-up. Not so with a manufactured SPAC (Special Purpose Acquisition Company). SPACs provide all the benefits of a public shell, but without the drama of possible issues missed in due diligence.
Second, reverse mergers themselves typically lack a financing event. The bonus of an APO is its concurrent PIPE financing, providing immediate capital growth or liquidity tools for the private firm looking to use the public markets to assist in expansion. PIPE financing is extremely flexible and can be used in management/investor buyouts, corporate growth or debt conversion or retirement.
Apart from the roughly $50,000 manufacturing costs for your SPAC, an APO’s cost is often dependent on the terms of the agreement with your financier. If a SPAC is all that is needed, then the costs can be fairly minimal. If you’re looking to buy an existing, trading shell, the current going rate is somewhere around the $400,000 range. An existing shell has a much faster time-to-market, while custom manufacturing your investment vehicle can take up to several months.
Direct Public Offerings
In a Direct Public Offering (DPO) a private company circumvents the need for an underwriting by a FINRA registered broker-dealer. Instead of the broker selling shares to third-party prospects, a company simply registers shares for sale with the SEC and does their own offering to their own personal network. Such an offering typically includes friends, family and business associates. While there are sometimes limitations to the size of a DPO, the flexibility and control it provides smaller organizations can be helpful. DPOs can be either debt or equity-based, there are minimal on-going reporting requirements, public advertising is allowed and you can talk directly to investors.
The consulting costs and timing for a DPO are faster and more efficient than any other offering scenario. The legal prep for a DPO is fairly quick and is often treated like a PPM. $20,000 (typically less) is a decent budget for your DPO registration. The outreach and time to get the shares sold is most often dependent on your company’s internal ability to promote the securities.
Today’s financial waters are shifting dramatically. The JOBS Act, while promising game-changing help for capital raising, remains yet to be fully implemented as a law. Getting around the regulation and the potential for fraud has been a big deal. Equity crowdfunding, particularly financing with Title III, where non-accredited folks can invest small amounts of private equity. Such financing remains the proverbial and silent elephant in the room for funding assistance, particularly for start-ups and micro-cap stocks. Once the JOBS Act is fully implemented, the creative opportunities and mixed-bag options, including crowdfunding mixed with PIPE and reverse mergers could provide some very compelling investments for even the smallest investor with as little as $1,000 to throw at a deal.
Each type of public financing event can be geared toward the specific needs of the individual business. Circumstances, both internal and external can have an impact on which type of public financing event a particular firm may choose to engage. For instance, the size of the company, the requisite speed to market, the going public budget, the capital financing needs, the need for investor liquidity and the macro market situation all play a vital role on whether the company performs an IPO, APO or DPO. Nailing down the right type for a particular business depends on the direction dictated by the business, the management and the overall market. Choosing the right path can mean real differences in the ultimate outcome of the company long term.