By Carol Tice
Exclusively for BVR Times
Taking your company public is a big pain. The time and money expended in the process are both substantial. IPO hopefuls must file extensive disclosures about company operations with the Securities and Exchange Commission, find an underwriter and promote the IPO to investors. After all that, the effort may not be successful.
Some small- to medium-sized businesses skip all that hassle and go public through an alternative public offering. Alternative IPOs tend to be popular when markets are tight, as we're experiencing now.
Prepare yourself as we tiptoe through a minefield of acronyms you'll need to know to understand how alternative offerings work. I promise it's really not all that complicated.
A typical alternative public offering deal has two important components: a reverse merger and a PIPE, or private investment of public equity.
Reverse merger. Also known as a reverse takeover, a reverse merger takes place when a private company acquires a public company. It's called a reverse merger since ordinarily, public companies tend to acquire private ones as the public companies are better-capitalized. Also, the public company usually dominates the merged entity, but here the private company management team ends up in control.
Often the public company being acquired in a reverse merger is a special purpose acquisition company, or SPAC. It's better known to ordinary folks as a shell company.
SPACs are formed for the purpose of finding and funding a private company that wants to go public. Public investors buy SPAC shares based on the track record of managers involved.
The SPAC does no business, it simply has an organizational structure and money. Usually, a big investor in the SPAC heads the organization. Because it isn't doing business and is really just a lump of cash, the SPAC faces less rigorous requirements for going public than would an ordinary company.
The company looking to go public acquires the public SPAC in the merger. The combined company is then a publicly traded entity. Presto! Your company has gone public.
PIPE. The reverse merger is usually accomplished via a private investment in public equity, or PIPE, deal. That is, the SPAC sells its publicly traded shares to private investors – namely, the owners of the entrepreneurial business seeking to go public. One big advantage of PIPE deals is they can be conducted as unregistered private-placement offers, once again skipping the lengthy SEC stock-sale registration process.
Pros and Cons
Advantages of going the alternative IPO route include lower cost, less public disclosure and less hassle. Companies do not need to find an underwriter to conduct an alternative offering or go on a "road show" to promote their stock.
There are two primary disadvantages to going the alternative IPO route. The first is the difficulty of locating a SPAC interested in merging with your startup. There are a limited number of SPACs functioning at any given time, and they tend to focus on companies in a few specific industries such as technology.
The second drawback is that instead of acquiring many small shareholders, in an alternative IPO you have essentially taken on a single investor, the SPAC. The SPAC funders may demand an active role in shaping your company's future.
Going public through an alternative offering in no way diminishes your chances of company success. Companies that went public through reverse mergers include Turner Broadcasting Systems, Blockbuster Entertainment and Berkshire Hathaway.
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