10/24/2011 03:36:00 PM EST
Tip of the Week: Make Sure You Should be Public
I often tell my clients, if you can benefit from being
public, and can bear the risks of doing so, you should seriously consider it,
regardless of your stage of development. However, in any well formulated
decision, it is important to review the pros and cons. There are four
well-recognized disadvantages to being public.
First, Wall Street places pressure on public companies to
deliver short-term results. This forces the public company to concentrate on
making wise decisions but also focusing on how those decisions will be
perceived by analysts. Spending on long-term projects can often lead to
impatience from "the Street." This pressure also creates incentives for dubious
practices such as logging revenues prematurely or delaying expenses to make the
current quarter look better. Second, for some companies public disclosure of
everything important that is good and bad in a company could be problematic. It
also means competitors will learn detailed, otherwise confidential information
about your company. Senior management's compensation, all major customer
contracts, any related party transactions, all comes out.
Third, it is not inexpensive to be public. You need
lawyers, auditors, additional staff, an investor relations firm and other
filing costs. These can be the difference between a public company's
having positive or negative net income. It can cost even a small public company
between $300,000 and $800,000 per year just to be public. Last, public
companies are more open to lawsuits, many of which are simply legalized extortion
following a precipitous drop in a stock's price. Some companies choose not to
go public just for this reason, though a 2006 law restricting class action
lawsuits has had some effect on ameliorating this problem.
Of course there are many benefits to going and being
public as we know. Access to capital, facilitating acquisitions, offering
liquidity to investors, stock options for executives and good publicity are all
very important positive aspects of a publicly trading stock. Just make sure you
have the right team in place to help you analyze these advantages and
disadvantages for your particular company.
For additional insights on reverse mergers,
SPACs, other alternatives to traditional initial public offerings, the small
and microcap markets and the economy, visit the Reverse Merger and
SPAC Blog by David N. Feldman, Esq., Partner of Richardson &
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