Strategies for going public

ARTICLE | October 06, 2022

Authored by RSM US LLP

What are the advantages and disadvantages of going public?

The process of going public has a significant impact on any company and its employees. It is transformative for companies and should be considered holistically to determine if it is the right strategy for the company. Below we provide our perspective and observations for management’s consideration in the process.

How much does it cost to go public?

The process of going public can be costly, in terms of both dollars and time. It requires the attention and heavy involvement of the most senior levels of management, which can distract from normal business operations.

The most significant financial cost is typically associated with the engagement of investment bankers to assist and advise in the transaction, the compensation for which is often a percentage of the proceeds or deal funding. To assist in the process, the company will often also need to engage external advisors in the legal, HR, tax, accounting, and IT fields.

Going public may result in significant one-time or nonrecurring costs for these advisors, all of which may fluctuate due to the size and complexity of both the company and the deal itself. These costs include approximately 6% to 8% of the total deal value for underwriter fees, 1% to 2% for legal fees, 0.5% to 1.5% for accounting fees, and an additional 0.5% to 1.5% for other fees (printing, SEC registration, etc.).  In addition, management will need to consider increases in recurring costs that may result from higher compliance costs, both internally (e.g., for internal audits) and externally (e.g., for Public Company Accounting Oversight Board audits), additional legal fees, directors, and officers insurance, and more. 

What should be considered before you go public?

Going public involves more than simply filing a registration statement with the SEC and listing on an exchange. The effects will be felt throughout the organization, so the decision requires careful consideration of a number of important areas, including:

• Process and controls – Management will be required to certify the company’s reporting and disclosure controls and demonstrate establishment of an effective control environment that will be subject to internal and external examination and testing.
• Information technology – Public investor reporting requirements often demand that the company’s enterprise reporting system and general IT environment and controls meet future-state requirements.
• Tax – Restructuring activities may be required to ensure the current company owners receive the maximum tax advantages during this process. In addition, management must ensure the company has accounted for any potential tax exposures or obligations that may affect its financial position.
• Human resources/capital – For a public company, a more robust talent management and development program, as well as an executive compensation plan, may be required. Increased efforts to integrate the HR function throughout the organization may also be necessary.
• Financial reporting and accounting – Financial statements included in or incorporated by reference into SEC registration statements must be audited in accordance with PCAOB auditing standards, which typically require additional supporting documentation and analysis as compared to generally accepted auditing standards. Management is responsible for preparing any additional information required.
• Financial planning and analysis – The company will be expected to have a process in place for development of budgets and financial projections to provide earnings guidance to the public. Engagement of experienced professionals who can evaluate the company’s financial strategy will also be required.
• Corporate governance and compliance – The company will be required to establish a board of directors and form committees focused on areas such as audit and compensation. It must also establish a code of conduct and an ethics and whistleblower program.

How long does the going-public process take?

The timeline can vary by the type of transaction—initial public offering (IPO), acquisition by a special purchase acquisition company (SPAC), reverse merger, or direct listing. In each case, the process is complex and requires significant time to plan and execute to ensure success.

• From initial exploration to preparation and execution to active trading, an IPO can take 12 to 18 months.
• For a de-SPAC transaction—in which a private company is acquired by a SPAC, or blank check, company, resulting in the private company becoming publicly traded—timing varies widely and is generally dependent on the readiness of the private company to issue SEC-compliant financial statements. However, a de-SPAC transaction typically has a shorter turnaround than a traditional IPO—generally three to six months, depending on the timeliness of SEC review during the comment process.
• A reverse merger, in which a public company merges with a private operating company and the private operating company is determined to be the accounting acquirer, resulting in the private operating company subsequently becoming a publicly traded company, has a similarly wide range of timing and dependency on the readiness of the private company to issue SEC-compliant financial statements. A reverse merger is similarly expected to have a shorter turnaround than a traditional IPO.
• Direct listings, also known as direct placement or direct public offerings, do not involve the creation of new shares; only existing, outstanding shares of a company are sold, with no underwriters involved. Direct listings will require the same filing and reporting requirements of an IPO but, without the need for intermediate underwriting and marketing, may be completed faster than a traditional IPO.

How will going public affect my company?

The company’s access to public funding and financing can unlock and enhance strategic options to build and grow the business. Having the appropriate infrastructure in place—including enhanced financial reporting requirements and IT system capabilities, additional human capital and talent, and increased focus on internal processes and controls—is paramount. The decision to go public requires careful consideration of the investments in the process and the cost of ongoing compliance versus the advantages of being publicly traded.

IPOs, SPACs, reverse mergers, and direct listings

What are the requirements for an IPO or direct listing?

Various SEC rules and regulations need to be adhered to when preparing for an IPO, involving both legal and financial aspects. A company that elects to pursue a direct listing is required to adhere to these same guidelines. The key difference in a direct listing is that an investment banker isn't involved in the offering process.

An entity making an offering of securities registered with the SEC under the Securities Act of 1933 must file a registration statement and distribute a prospectus in connection with the offering. The registration statement and prospectus must contain financial statements and other information regarding the financial condition of the company and its operating results. The SEC has specific, complex rules regarding the financial statements and other financial information that must be presented in a registration statement for an IPO. The nature and extent of financial statement information that will be necessary requires analysis and confirmation with counsel and auditors and will vary depending on the size of the company, timing of the filing, and a number of other factors.

In addition to fulfilling the SEC requirements, to have its shares traded on a stock exchange a company must meet certain liquidity and financial requirements, which involves evaluation of tangible net worth, historical profitability, and minimum IPO market value. Each stock exchange, including the NYSE and Nasdaq, has its own initial and ongoing listing requirements, some more stringent than others.

Prior to embarking on an IPO, a company should consult with an investment banker, SEC counsel, an external auditor, and IPO advisors.

How does going public through a SPAC differ from a traditional IPO or direct listing?

A traditional IPO or direct listing involves the listing on a public exchange of a company’s newly constituted stock or existing corporate stock. A SPAC transaction involves a blank check company acquiring a private operating company with issuance of existing stock or with cash, at which point the private company becomes the public operating company registered on the exchange. Another difference relates to the evaluation of the newly public company’s status as an emerging growth company and smaller growth company, which may be affected when considering the SPAC entity in the analysis. Choosing the path that best fits your company’s strategy and organization requires careful consideration.

How can my company prepare to be acquired by a SPAC?

To gauge readiness to be acquired by a SPAC, we recommend that each company evaluate important changes that may be required throughout their organizations, including in accounting and finance, tax, IT, and HR. In these areas, management should carefully consider whether the target company’s internal resources, processes and reporting, and existing or available data will be sufficient to meet the expectations and requirements for a public company. Often, a key first step for a company looking to be acquired by a SPAC is engaging financial advisors to assist with the marketing and evaluation of options along with the appropriate advisors to help management determine the necessary organizational changes.

What is the process to go public through a reverse merger?

A reverse merger is one in which the legal acquirer, often a SPAC or public operating company, acquires a private company, the legal acquiree; however, the business combination agreement deems the private company the accounting acquirer (usually with the private company obtaining a controlling stake in the public company post-merger). In a reverse merger the accounting considerations, particularly purchase accounting, can change, and it is important to carefully analyze the facts to ensure the transaction is presented and recognized appropriately.