Taking Your Company Public Taking a company public is a complicated but rewarding process with significant advantages to be gained in terms of access to capital, liquidity for shareholders and public relations exposure. However, if you ask any senior executive at a newly public company about major initial public offering (IPO) challenges, chances are they will put accounting and compliance at the top of the list. Most private companies do not have the “bench strength” or financial processes to adequately respond to the rigors of public company reporting.
While the JOBS Act streamlines the IPO process and provides relief to smaller companies with regard to the audit of internal controls over financial reporting, this legislation does not remove the requirement for CEO/CFO certifications of internal controls. Significant efforts are required to both prepare for an IPO and maintain compliance with regulatory standards and investor expectations after becoming a public company.
Why Go Public? Most companies go public to raise capital through the sale of stock or by issuing bonds.
Many potential investors will never invest in a private company because the offered stock is not liquid. Publicly traded companies, however, offer a liquid investment, reducing the investment’s risk. These investments can bring immediate cash resources to a publicly traded company which can be used for numerous purposes, such as paying off debt, expanding the company, or marketing and development.
A publicly traded company can also return to the market for additional capital by issuing a bond or a convertible bond (a type of bond that can be converted into shares of stock) or through a secondary stock offering. Being a public company also gives both companies and their founders a sense of prestige, which may increase business or financing opportunities. And when a company’s stock is sold initially, the company receives additional publicity, not only in its regional area but around the world, a valuable marketing tool Taking Your Company Public 1 for any business. Public companies can also use stock options to attract and retain quality employees, as owning stock options gives employees a formal stake in the company and a valuable financial incentive to contribute to the company’s success. Finally, going public provides the owners and founders of a company with an exit strategy by allowing them to sell their ownership holdings in the business. Public Company Challenges There are, however, challenges to going public that should be considered. Not only must the company’s profits be shared with investors, there is less confidentiality and increased public scrutiny.
Public companies must adhere to the numerous financial reporting requirements and regulations governed by the Securities and Exchange Commission (SEC), and shareholders must be informed about the company’s management, business operations, and financial conditions, which creates additional costs and legal obligations. In addition, management’s actions must often meet the approval of the Board of Directors and shareholders, creating an inflexible environment for those in charge. Going public is also costly, not only because of all of the filing requirements but also because of the added legal ramifications for CEOs and CFOs providing financial statement certifications under the SarbanesOxley Act (SOX). The CEO and CFO of a public company could face significant penalties if they certify that their company’s internal controls over financial reporting are effective when they are not.
These penalties could include prison sentences, fines, and other disciplinary action such as civil and criminal litigation, as well as being barred by the SEC from ever serving as a corporate officer or director. Furthermore, now that executives are being held personally responsible for their company’s financial statements, they must not only consider their company’s bottom line, but their own personal bottom lines as well. The certifications required by Sarbanes-Oxley require more due diligence for the CEO, the CFO, the audit committees, internal auditors, and the auditors in reviewing the financial statements.