Going public is often one of the most profitable corporate strategies for any business, but it is important to be aware that many business owners fall victim to five top mistakes that plague private companies when they go public. This drastically reduces their chances of success.
A company is said to be “going public” when it makes an initial public offering (IPO), a term used to describe when a previously privately-held company offers shares to the public for the first time.
Business owners often aspire to see their companies featured on the New York Stock Exchange (NYSE) or Nasdaq because of the potential to generate equity financing on the stock market. The capital generated through the sale of shares can be used to further facilitate a company’s growth, catapulting it to new heights. Knowing how to go public with your private company can be the difference between being able to support yourself with your business and making billions.
Knowing What to Avoid When Taking Your Private Company Public
There are many marketing and public relations faux pas that can be committed when going public, but no errors are quite as grave as those that could potentially land you in trouble with the law or in contravention of applicable legislation. Fortunately, these pitfalls can easily be avoided under the guidance of experienced legal counsel.
Mistake One: Not Setting a Fair Option Exercise Price
We’d all like to believe that the companies we built with our blood, sweat, and tears are priceless, but that’s not the way the stock market works. Before going public, you’ll need to determine a fair price for the shares you will be offering as part of your IPO. This price needs to be determined through a thorough analysis of the company’s assets, liabilities, and future prospects.
Setting your share price at a value that doesn’t reflect your company’s real financial position could lead to a number of unpleasant tax consequences under Internal Revenue Code Section 409A.
Mistake Two: Forgetting to Take the Grant Date Into Account When Setting an Option Exercise Price for Your IPO
If calculating a fair price for your shares before taking your private company public doesn’t sound tricky enough, consider that the price you set for the shares you will be offering during your IPO needs to accurately reflect the value of your company at the grant date, not at the date you were doing the initial research for your registration statement.
This means you need to pre-emptively calculate what your company will be worth on the first day of the offering period to avoid suffering the tax consequences mentioned above.
Mistake Three: Engaging in Gun Jumping or Accidental Insider Trading
Both gun jumping and insider trading resulting from a contravention of Regulation Fair Disclosure can result in your IPO being delayed, hefty fines being imposed on your company, and even personal liability.
Gun jumping occurs when a company accepts offers on its shares during the pre-filing period, the waiting period, or the post-effective period; it is an action that is strictly prohibited by the Securities Act.
On the other hand, Regulation Fair Disclosure disallows insider trading once the offering period has started by forbidding executives from sharing non-public company information with outsiders to allow them to take advantage of fluctuations in the stock market that other investors might not be able to foresee.
It’s easy to accidentally commit insider trading over a glass of red wine with a couple of friends during a casual conversation about your businesses, but even accidental insider trading can lead to penalties being imposed on your company or its IPO.
Knowing how to take your private company public without incurring the wrath of the law is the first step in helping your business make a smooth transition into its new place on the stock market.
Mistake Four: Not Doing Due Diligence in Compiling Your Registration Statement
To err is human, or so they say, but your registration statement is not the place to make mistakes before going public. Material representations like miscalculations in financial statements or negligently forgetting to mention that one of the company’s directors is retiring soon can put you in contravention of several sections of the Securities Act and Exchange Act.
Section 11 of the Securities Act even allows disgruntled investors to sue everyone from the company’s underwriters to its directors for this offense. The courts have proven time and time again that they’re willing to force companies to refund plaintiffs, which means that it is wise to hire counsel to assist you in drawing up this statement.
Mistake Five: Not Watching Your Words Before Going Public
When it comes to going public, you need to be wary of every statement you make, not just the ones you put to paper. Section 12(a)(2) of the Securities Act allows plaintiffs to reclaim costs and damages if you manage to convince them to invest in shares in your company through an oral statement, brochure, or prospectus that contains untrue information.
It’s important to market your company, but be careful not to market it so well that you represent it as being more successful than it truly is.
Final Thoughts on Avoiding the Top Mistakes That Private Companies Make When Going Public
Going public with your privately-held company might seem like an insurmountable task that is surrounded by a mire of legal traps and public relations nightmares, but it doesn’t have to be. With the right attorney at your side, you can conquer the stock market and seamlessly make the transition leading up to your IPO. Contact me today to get started on fulfilling your goals!