Tip of the Week: Make Sure You Should be Public

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 & Patel LLP.

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