Taking Your Company Public -- But Not in America

By Carol Tice

There's been much chatter in investment circles about how many foreign companies have gone public on U.S. stock exchanges in the past year -- 21 of the 154 companies that have gone public so far this year hail from China, PricewaterhouseCoopers reports. But less has been said about the reverse trend -- American startups going public on foreign exchanges.

As it happens, I had a local company here in Seattle do just that earlier this year -- HaloSource, which makes safe-drinking-water technology. Back in October, the Bothell-based company raised $80 million on the AIM exchange in London.

Going public on a foreign exchange has some allure right now since the domestic IPO market, while recovering, is still a pretty tough neighborhood for startups especially. So the AIM in particular -- which is intended specifically for "smaller growing companies," has a distinct allure.

One feature many companies may find appealing about going overseas: Since the stock is not registered in the U.S., the company does not have to reveal their finances to anyone here at home...though there are workarounds if a person is really dying to get their hands on your numbers. A Seattle Times editor didn't have too much trouble digging up the news that HaloSource made $11.8 million last year, and was expecting 40 percent growth or more in 2010.

Growth was only 18 percent in the past year, raising questions about whether such rapid growth was achievable. Guess investors abroad will find out when the company releases their 2010 numbers...only in Europe.

Dark side: Your company cannot sell the stock to any U.S. investors, as the shares are not registered here. Without anyone in your hometown crowd buying shares, it may be harder for you to find enough investors to support an overseas IPO.

If you have overseas venture-capital backers, though, they may have the connections to make a foreign IPO work for you. A company could use money from an IPO on AIM or another foreign exchange to grow, and then perhaps move to a U.S. exchange. Having already been public, a company might be more ready for the scrutiny of the U.S. Securities and Exchange Commission -- and might be a little bigger and more interesting to domestic investors.

Are you considering an IPO for your company? If so, would you use a foreign exchange? Leave a comment and tell us your thoughts about doing an IPO abroad.

Photo via stock.xchng user svilen001

Big-Name IPOs Put Going Public Back in the Spotlight

By Carol Tice

After being pretty much pronounced dead in early 2009, the initial public offering (IPO) is officially back this week with big-money offerings that observers are expecting will help perk up the marketplace.

The marquee name is General Motors, which is raising a cool $10 billion as it pays off its government bailout. But the real news is the market has been recovering steadily for months, and GM will just help more people notice the trend. That's good news for the backlog of interesting smaller companies that has been circling the IPO airport trying to find enough lift for takeoff.

Some really interesting companies have been taking the IPO route in recent weeks, including The Fresh Market, an upstart Whole Foods-type regional grocery chain that raised $290 million. Primo Water, which sells water dispensers, raised $100 million.

Many more are still on deck. For instance, Zipcar -- the fast-growing car-sharing company, which hasn't yet made money -- filed back in June but has yet to go.

For much of 2009, the only companies going public many weeks were either Chinese, or a real-estate investment trust (REIT), or a special purpose acquisition company, or SPAC. That last is really just a lump of money looking to acquire companies. In other words....bo-ring, and nothing that indicated small U.S. companies would have any luck in the IPO markets.

But this week, GM is joined by two other major companies in making an IPO debut. Also on the calendar are Caesars Entertainment and management consultancy Booz Allen Hamilton. The return of name brands to the IPO markets will likely get a lot more companies -- particularly ones with venture capital backers itching for a payday -- to give the public markets another look now.

To date, the IPO volume in 2010 is about double that of all of 2009, Renaissance Capital reports. Comparing year-to-date, we're waaay ahead -- there were only 82 deals at this point last year, versus 235 in 2010. Even more interesting for small businesses, the average company age is getting younger this year -- 15 versus 19.

Obviously, that's still pretty conservative. The average age was 11 in 2007, Renaissance Capital's data shows. But it shows the pendulum is swinging back again toward the IPO markets being a bit more welcoming to smaller companies, especially ones with a great story.

Photo via Flickr user H.G. Wood Project

IPO Strategy Guide: 10 Steps Your Company Must Take

By Carol Tice

The market for initial public offerings is slowly starting to percolate again, especially for smaller companies, which had been totally shut out of the market for a while there. Going public definitely has its pluses and minuses, especially in this era of zigzagging stock markets, but more companies are starting to consider an IPO.

So far this year, the typical IPO hasn't performed very well, so if you have dreams of a big, instant payday, think again. Going public also brings a large burden of public scrutiny and overhead cost in complying with all the rules the Securities and Exchange Commission has for public companies. But an IPO can provide access to big capital few other vehicles can provide.

If your company is thinking IPO, what are the steps you need to take to get ready? Here's a look at some of the ducks you'll need to get in a row before you're ready to go public:

1. Be big enough, for long enough. Before you can go public, you'll need to demonstrate your company is a going concern with solid revenue and profits. To go public on the NASDAQ Capital Market -- the exchange often used by startups -- you'll need to meet some basic standards. NASDAQ provides four ways to qualify for an IPO. For instance, you can qualify with a total of at least $11 million in pretax earnings over the past three years, with the two most recent years showing at least $2.2 million in income. Another way: you can also qualify with one-year sales of $160 million plus $80 million in capital assets.

2. Get the company shipshape. Prepping for an IPO often involves cleaning up those financial statements to make the company look as good as possible. Assets might be sold to pay off debts, unprofitable divisions could be closed or sold off, or marketing expenses may be cut back to show improved profits.

3. Prepare your financials. No matter what method you use to qualify for your IPO, you'll need at least three years of audited financial statements to go public. Once you've got your company in the best shape possible, hire a crack accountant and prepare your statements.

4. Beef up your management team. In order to make investors entrust their money to your company, it's important to present the strongest possible management team. It's hard to get investors to take a flier on a CEO who's never led a public company before. Often, company founders become chief technology officers or step down to be president or chief operating officer, while a CEO with previous public-company experience is brought in to oversee the IPO drive. It's also not uncommon to hire a chief financial officer with a strong resume at this point. This is sometimes called "professionalizing the management."

5. Comply with the rules. Public companies must obey a complex set of rules known as Sarbanes-Oxley, after the Congressman who first proposed these regulatory reforms. SOx, as it's sometimes known, describes information you must disclose about your company, and sets standards for corporate governance. Often, as companies prepare for IPOs, they find they need to add independent board members in order to have enough independents on all of the required board committees to satisfy SOx.

6. Find market makers. To go public, you'll need at least two sponsoring institutions that agree to buy a substantial block of shares and help you interest investors in the offering. These are known as "market makers." Often, these are investment banks.

7. Prepare your registration statement. Once you've got the revenue, management team and other requirements met, your company has to create a public filing known as an S-1. This filing will describe your company's operations in detail and disclose complete financials for revenue, profits, assets and debts. You will describe what your company plans to use its IPO money for, discuss your competitors and how your company is different, and much more. S-1 filings often run more than 100 pages.

8. Write your prospectus. Also known as the offering documents, your prospectus tells investors the story of your company. Be prepared to quantify your company's market opportunity, and your strategies for growth.

9. Pay the fees. It can cost up to $75,000 in filing fees to go public. You'll pay more for legal advice in preparing your S-1. The first $5,000 portion of the fee is nonrefundable. In addition, you'll usually pay fees to your market makers, as well as granting them options for stock in the IPO.

10. Hit the road. Once you've lined up your market makers and done your filings, it's time to meet with major institutional investors to try to get them excited about your stock. You can really rack up the frequent-flier miles during this phase of the IPO run-up, usually known as the "road show." Road shows can last a few weeks or a few months, depending on how well you do at convincing investors to buy into your IPO. When you feel you've got a critical mass of investors ready to buy shares, you're ready to price your IPO, go public, and move into your business's next phase of life as a public company.

The IPO process can take a few months, a year or more, or never conclude. When there isn't enough investor interest or the market seems unfavorable, IPOs can be called off. Last year, for instance, nearly 50 IPOs were withdrawn, Renaissance Capital reports. In 2008, more than 100 IPOs were withdrawn. This year we're doing better so far -- more than halfway through the year, only 19 IPO filings have been withdrawn.

Are you thinking IPO? Or think those who are thinking IPO right now are crazy? Leave us a comment and share your feelings about going public in 2010.

Photo via Flickr user davidcrow

All About Alternative Public Offerings

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.