Alternatives to the IPO: Public Market Liquidity for the Small Business

small business frauds

Let’s face it, an Initial Public Offering (IPO) is not in your future.  I’m not trying to be mean, just realistic: an IPO will never be a fit for 99% of companies. Selling stock to the general public is just too complicated, too expensive and relies too much on rapid growth and big profits.

But that doesn’t mean that you can’t get the benefits of being on the public stock market — the flexibility, prestige and access to capital might be closer than you think.

Options for “Going Public”

Numerous options exist for taking almost any company public. Determining which method is right depends on a number of factors, including your budget, how much time you’re willing to spend, the company’s current liquidity and your capital needs. If you’ve ruled out a true IPO, you have two options:

  • Direct Public Offering: Often referred to as a DPO or self-filing, a direct public offering provides a means for a smaller, private company to go public. Since there is less marketing to the public, it is much less expensive than a traditional IPO.
  • Alternative Public Offering: An alternative public offering (APO) can be one of the most cost effective methods for going public. An APO means merging your business into an existing public shell (called a “reverse merger”), and may or may not include raising new capital. When capital is invested, it is typically through a “Private Investment in Public Equity” or PIPE. This is the least expensive method of the three.

Either of these two methods is going to cost much less than a traditional IPO – and can sometimes be completed for as little as $40,000.  That seems like a small price to pay for the benefits of being public.

Whether you strike it rich from a true IPO or take the less expensive route of an APO or DPO, the end result is much the same: having a publicly traded stock may make investors more willing to invest in the business and trading partners more willing to extend you credit.

The Costs of Being Public

No matter which path you take, becoming public is only the beginning of the expenses you’ll face.  Be sure you understand the on-going listing, accounting and finance costs of maintaining an actively traded public stock. The mandatory SEC reporting and annual audit requirements can run between $30,000 and $100,000 each year. Can your business afford that extra expense every year?

Being a public company also requires that you disclose a large amount of data about your company in quarterly and annual reports to the SEC. This greater transparency means your competitors, suppliers and customers will have access to what may have once been considered secret or proprietary. Management and shareholders need to be more comfortable with the consequences that greater exposure can have on the business.

Why use an Alternative Offering strategy

Non-traditional public offerings have the advantage over costlier IPOs in several ways:

  • Faster to market. Both APOs and DPOs are much faster than IPOs. If speed is what you need, alternative methods are often more desirable.
  • Less equity dilution. Alternative Public Offerings often require a great deal less dilution of the company’s equity. Giving up less ownership keeps you in control.
  • Avoidance of “IPO window”. In a typical IPO, the macroeconomic climate plays a big role in the success of an IPO. If a company seeking a traditional IPO misses the IPO window, they may not be able to access the public markets for several more years. But investor sentiment and macroeconomics have little impact on the alternative offering
  • No underwriter. Avoiding the use of an IPO underwriter saves a great deal of cost. Unfortunately, it’s also one of the reasons APOs and DPOs raise much less capital than an IPO.
  • Lower overall cost. A traditional IPO costs magnitudes more than do the DPO and APO.

The Downsides

Every silver lining has its dark cloud. Direct offerings and reverse mergers have their fair share of dangers and downsides. Here are just a few.

  • Less capital raised: Because an underwriter does not perform a promotional road-show, fewer investors will be interested and less capital will be raised.
  • Greater legal exposure: Public companies are more likely to be sued – much more likely, in fact. Greater legal exposure can also mean greater insurance and legal costs if your company either doesn’t do well or misrepresents reality to boost stock price.
  • Fraud: Fraud, greed and unscrupulous characters haunt the APO and DPO markets in part because of the opportunity to make large sums of money by deceptive practices.

For most companies looking to raise capital through the public markets, “going public” via traditional IPO is simply not a cost-effective option. Allowing small companies the ability to go public without going broke will remain an important way to get the benefits of being public without the high initial costs.

Guest blogger Nate Nead is the Managing Director of ROI and ReverseMergers.com. He assists companies and entrepreneurs in accessing the liquidity available only through the public markets. He and his team of experts have helped over 100 companies gain access to the public markets over the last 25 years. Nate resides in Seattle, Washington.

photo credit: yoni sheffer via photopin cc

1 Comment
  1. Great post Nate. I’m often intrigued and somewhat caught off guard by the lack of news and information disclosure about alternative methods for going public. I don’t know if it’s the attraction of being “private” and keeping info under wraps or a lack of action due to lack on knowledge on behalf of business owners, but it’s rather interesting. Particularly concerning DPOs; I’ve worked with micro businesses for over ten years and getting involved with a DPO for expansion purposes (especially for acquisition opportunities) seems to make a lot of sense. But, of course, the ‘economics’ of the deal must make sense (i.e. cash flow, liquidity, and management structure). Again, great post Nate.

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