by Kevin Sarney, Life Sciences Practice Leader
Taking your firm public is a significant milestone, opening up new opportunities for raising capital. However, the process can be complex and time-consuming, requiring careful planning and execution. In the US, there are three common routes to public listing. The fourth route, utilizing a SPAC (Special Purpose Acquisition Corporation) is not as popular in the last two years.
#1 The first option is a traditional Initial Public Offering (IPO), where the company engages a consortium of underwriters, files with the Securities and Exchange Commission (SEC), conducts a roadshow to attract potential investors and then prices the offering to go public. This process is typically comprehensive and demands substantial resources and preparation.
#2 The second route involves a process known as Form 10, a quicker route that entails selling private securities in a private placement. While faster to market, this method comes with its challenges, such as maintaining a public float and attracting analyst coverage, which is crucial for public companies.
#3 The third route is a reverse merger, which allows a private company to become public with or without raising capital. This process involves merging with a public shell. However, the strategy has drawbacks, including potential misalignment with the existing “shell” investors and potential liabilities that exist inside that “shell.”
JOBS ACT of 2012
The JOBS Act of 2012 established a new environment for smaller companies—under $1 billion in revenue— going public. The Act permits companies to file draft registration statements confidentially and engage in conversations with qualified institutional investors to gauge interest. This allows firms to shield sensitive information from public scrutiny while preparing for a public debut. And if you decide not to go public, the market (competitors) and potential partners are shielded from the news of that decision.
Moreover, the JOBS Act provides certain exemptions, such as not requiring an “internal controls” opinion by an external audit firm and offering an extended phase-in for implementing new Generally Accepted Accounting Principles (GAAP).
Taking a company public is often a 6 to 12-month process, demanding significant legwork at the front end, including lining up backers, obtaining audited financials, and developing the S-1 document, a comprehensive marketing and financial document.
Following submission, the SEC will review and return with comments, requiring the firm to respond and file an updated document. Before embarking on this journey, companies need to consider several factors.
1. Financial statements
First, the financial records must be accurate, reconciled, and reported. The quality of your financial records will significantly influence the time needed for the mandatory (PCAOB - more comprehensive) audit.
2. Filing dates
Companies should also understand filing dates as the S-1 requirement for two years of financials could go stale, necessitating updates with new quarterly or full-year audited financials.
The need for experienced professionals is another consideration. Going public requires a team of financial, project management, and marketing experts. Outsourcing with a seasoned team can support this process. Post-IPO, the firm will also need a robust accounting group to handle the public financial filings (quarterly 10 Q's, Proxy’s 8K’s and annual 10 K’s).
After going public, companies will face new demands, such as the need for board committees, particularly an audit committee. Corporate insurance such as directors' and officers’ (D&O) coverage will also be required, which can be costly.
Finally, cost is a significant factor. The process of going public can range between $1.5M and $3M, with additional annual costs for public filings, audits, SEC counsel, D&O insurance, staffing, and financial printing and filing.
Taking your firm public is a major decision with both substantial costs and significant upsides in terms of access to capital for growth. It is a journey that requires careful planning, strategic decision-making, and thorough preparation to ensure a smooth transition and a successful launch.
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If you’d like to discuss how your company can benefit from best practices for going public, don't hesitate to get in touch with us at (781) 431-0420 or email us.