Initial Public Offering (IPO)

In order to go public through an underwritten Initial Public Offering (IPO), a company must generate at least $50 million in revenue. However, a company can raise money in the public markets without using an underwriter. And, this option is available to any company, regardless of revenue.

In order for a company to raise money in the public markets they need to get their name listed on a public exchange and receive a stock symbol. In order to purchase the stock, the company must make an arrangement with a stock brokerage firm.

This option may provide the following benefits (since no method is ever guaranteed):

·        Reduces the need for venture capital

·        Increases valuation for the private company

·        Provides public stock as currency to acquire other companies and assets

·        Creates liquidity

·        Offers prestige

·        Avoids having to issue debt which may collateralizes your assets

Once a company goes public, they are benchmarked by their stock price which is often referred to as capitalization. As a public company, the formerly private company can do a private placement at a deep discount to the market with the provision that the investors hold the stock for 1 year.

For example, a company goes public without initially raising capital and begins trading on the open market at $10.00 per share. An individual can go on the internet or walk into any stock brokerage firm and buy stock at $10.00 per share. Public companies in this situation often sell stock in a private placement at a very substantial discount to the open market price (in this example, perhaps $8.00 per share). The investors agree to hold the stock for a period of time. Because investors can buy the stock at a deep discount to the open market price it give them quite an incentive to invest, thus making it easier to raise capital.

Many small investment banks can help you raise capital once you are already public. They don’t take companies public themselves but can assist you in raising capital when you are public.

Another advantage of going public, which you do not have as a private company, is that you can advertise to the general public to raise capital. This must be done properly and you must do all the proper filings including filing an S-1 Registration Statement with the SEC.

This is quite an advantage because a private company cannot advertise and can only raise money from friends and family with which you have a pre-existing relationship.

In fact, if a company is interested in going public they may want to begin trading on the Pink Sheets. There are no audits; no periodic SEC reporting and no Sarbanes Oxley compliance (also known as SEC exemptions).