The immediate goal of many start-up companies is an IPO or Initial Public Offering. An IPO is the sale of the first stock of a private company to the public. Private companies go public so that they can use the publicly traded stock as a means of payment or increase their corporate value, issue stock for acquisition or it can increase the exposure to potential customers bringing the company into direct spotlight or going public can perhaps act as an exit opportunity for all the stakeholders who have their money invested in the company for years without seeing any increase in the incentives. Through an IPO these stakeholders can receive huge amounts of money. Bearing in mind, the benefits for a private company to go public, one might become curious about the cost of going public.
The cost of going public depends largely on the size and implications of the company. The cost of a more composite company is much higher. When there is an investment banking firm involved in the process, the average cost of going public can easily transcend $200,000. The costs without an investment banking firm can go up to $10000-$20000. The reason being, an investment banking firm comprises its own legal counsel. The stock exchange fees, which are approximately $10000 annually, grow with the client’s qualification to the NASDAQ or NYSE list. Miscellaneous fees, comprising of the press release fee, government fees can go up to $50,000 annually.
Equity crowdfunding or a Regulation A offering propounds a successful funding campaign that rules out all the downsides of an IPO process. Hence, many companies have raised money through either of these processes. Pursuing a direct listing is actually more pragmatic than pursuing an IPO and although IPO process and direct listings command their decent share of regulatory compliance, direct listing avoids certain steps that are involved in the IPO process. The direct listing gives the shareholders the chance to turn their shares into stocks which they can either sell or cling to as per their convenience. Another advantage of going public through direct listing is that it dispenses startup owners with the ability to steer the ways of promoting the listings and ultimately mollify the costs of going public
An investment banking firm is not a part of the direct public offerings/ direct listing, which is one of the three methods of going public. This disengagement of investment banking firms cuts down on the costs massively. This is because the investment banking firms use their own legal counsel and because there is no investment banking firm involved, the whole process is independent, regardless of the market conditions. The reasons for companies going public can be analyzed as follows:
Arrant accretion of shares of stocks
Public companies are able to finish off acquisitions easily because they can use stocks instead of cash considerations.
Enhanced shareholder liquidity
This is one of the most significant reasons why private companies go public. They intend to provide their shareholders with a market in which they can sell, buy or hold on to, shares.
Equity and debt financing
Most public companies render regular financial statements, which is what most investors expect and prefer.
Collating to private companies, public companies can raise funds in a much more effective and efficient way. Apart from this, they can complete transformative business transactions
Equity crowdfunding is a uniquely effective financial arrangement, for investors and entrepreneurs. Small businesses attract the needed capital through this arrangement of equity crowdfunding, in lieu of donations made by the inspired individuals. Whether charitable causes or start-ups, crowdfunding has made an incredible impact on the ability to raise money in huge amounts.
Potential investors are able to connect with companies seeking funding through special equity crowdfunding platforms. While crowdfunding is a boon for small businesses, it has impacted the economy in great ways and successfully created a faction of investors who are enthusiasts as well.
Direct Listing Requirements
Private companies, willing to go public, have in front of them, a platform of great opportunities and options. One might want to explore the difference between IPO and direct listing. Evidently, well-funded entrepreneurs usually go along with the direct listing. Despite similar legal desideratum, direct listing demands much less marketing and is less expensive.
Stock Options As A Recruitment Tool
Offering stock options to the employees’ means giving them the right to purchase a specific number of its own shares at a particular price and date, the price being lower than what it is to the public. This serves as a win-win, as the company attracts the talent to boost up the work and output. Assigning bonuses, companies, the gone public can offer stock options for recruitment. This is an efficient way to get employees on board.
While IPO is a good solution to go public, the direct listing can be an economical way of cutting down the costs of going public, saving efforts, and money.