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The dream of most entrepreneurs and business founders is to someday take their company public. Doing so can provide them with more access to capital to scale in the future, opportunities for growth through acquiring other businesses, or avenues to reduce their company’s overall debt.
It is a common belief that one must have an IPO (Initial Public Offering) in order to take a company public, but the truth is that there are plenty of other options available for taking a company public. While going outside of the traditional IPO path is unconventional, it can end up being what works best for some founders and their companies, depending on their goals.
IPOs still remain the most popular option for most companies seeking to go public, but they are not the only option. Here are some other ways to take your company public without an IPO.
Reverse mergers are a way for companies to go public by purchasing control of a public company. The biggest advantage of reverse mergers is how quickly one can take their company public.
Through a standard IPO option, it can take more than a year to go public, but with a reverse merger, one can take their company public in as little as 30 days. Reverse mergers work best for companies that do not necessarily need immediate access to capital, making them a great option for companies that expect to do very well in their first year as a public company — typically $20 million in revenue or more.
Direct listings allow companies to make existing stock that may be owned by investors or their employees available to the public. A direct listing is different from an IPO in that it offers existing stocks for sale — it doesn’t create a new stock offering as one would do with an IPO — and there are also no underwriters with direct listings.
IPOs typically also have what is referred to as a “lock-up” period that works to limit when existing stockholders can sell their shares in the company publicly, allowing a certain level of control over the price of the shares in an IPO situation. In direct listings, shareholders may sell their shares immediately after the company goes public, with no wait time.
Dutch auctions are named for the flower markets in the Netherlands and much like those markets, involve specific items for sale for a specific minimum price. Bidders will approach Dutch auctions by saying how many items they want to purchase and how much they’re willing to pay for them. The winning price is called a “clearing price” and it is what all winning bidders will pay for the offered stock.
This option for taking a company public puts the power in the hands of investors, who determine how much a stock is worth instead of leaving it up to investment bankers. For reference, this is the option Google used to go public in 2004.
The pros and the cons
There are many factors to consider when choosing how you wish to bring your company public. Each option — including traditional IPOs — has its pros and cons that businesses will want to research before deciding what is the best option for their goal of going public.
For example, while reverse mergers can be an effective option for scrupulous companies looking to go public quickly, there has been a history of unscrupulous companies that used reverse mergers to scam investors. Due to these few bad apples, reverse mergers have become more difficult to initiate and complete. Companies must pass stringent requirements to gain a listing on the NASDAQ and New York Stock Exchange, and it can take up to a year for those groups to agree to list the stock on the exchange — if the deal even materializes in the first place.
However, there have been a number of well-known companies that have used the reverse merger option to go public, including such well-known names as Dell. The option is quick and cost-effective for companies seeking to bring their offerings public.
Direct listings are a great option because they are more affordable than IPOs, as financial advisory fees can be far less than fees charged by investment bankers in an IPO situation. The lack of a “lock-up” period means shareholders do not have to wait to sell their stocks, which is another benefit of direct listings.
Nevertheless, it can be difficult to get anyone to pay attention to your stock offering if you are a newer business or not well known. In order for a direct listing offering to be successful, companies need to put some time and effort into marketing and getting their name out there. When one decides to go the traditional IPO route, they are essentially buying a team of investment bankers who are being paid to rally support for your offering. The lack of this support leaves the ball in the court of the business, and all of the pressure is on you to make your offering known and enticing.
Dutch auctions work well because they eliminate the worry of investment banks undervaluing their stocks. With a Dutch auction, the stock will be valued at what the market will bear, though there is no way to determine how many people will be interested in these stocks and the valuation process can be frustrating if it comes in lower than expected. Investment bankers and Wall Street are also reportedly not big fans of the Dutch auction option, which likely comes down to the option circumventing their role in the valuation of stocks. By choosing a Dutch auction option, one may be entering Wall Street as a bit of a maverick, which could alienate some potential investors.
Whichever path one chooses to travel on the road to going public, the type of business, valuation, sales, and timeframe in which one hopes to go public all must be taken into consideration. Businesses should not limit themselves only to an IPO as a pathway to going public. Instead, they should consider which route works best for them and their ultimate business goals.
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