The Public Markets - A Capital Idea

The decision to pursue a public securities offering in any form is unique to every company. Reasons vary and include the requirement to raise capital or positioning the company for a future liquidity event for current stakeholders. As with any significant strategic operational initiative, successful execution requires effective planning, human and capital resources and expert guidance. This is true regardless of the type of the offering - debt, PIPE, equity, PPM, etc. or the exchange location - domestic or foreign.

Companies considering a public securities offering need to establish an infrastructure to effectively and efficiently operate in the public arena. At a minimum, this includes:

Corporate Governance

The appointment of a Board of Directors with industry expertise and public company experience who understand the fiduciary responsibilities, regulatory demands and risk management issues of a public entity is a critical requirement. Smaller companies may also appoint an Advisory Board with expertise in various aspects of the company's business.

Internal Controls Over Financial Reporting

The adoption of accounting policies consistent with U.S. GAAP ("Generally Accepted Accounting Principles") and the establishment of a structure of internal controls consistent with the requirements of the Sarbanes-Oxley Act ("SOX") and the Dodd-Frank Act of 2010 ("Dodd-Frank") are also key requirements.

Financial Reporting, Disclosures & Regulatory Compliance

The ability to prepare and disclose accurate financial results on a quarterly and annual basis in accordance with U.S. GAAP and Securities and Exchange Commission ("SEC") regulations. This includes the filing of an Annual Report ("10-K"), Quarterly Reports ("10-Qs") and an Annual Proxy Statement ("14-A"). Significant corporate events need to be publicly disclosed within tight time-frames and the company will require the expertise to communicate and discuss all publicly-disclosed information with the investment community and stakeholders.

Also, most exchanges require audited Financial Statements and the company needs to consider tax reporting and compliance and tax strategies in anticipation of an offering.

In addition to the above, states and foreign jurisdictions generally require an Annual Meeting be held and that directors and independent auditors be elected in accordance with the company's charter and by-laws. Shareholder votes by proxy usually must be solicited. This process is governed by SEC proxy rules and requires the distribution of a Proxy Statement. The Proxy Statement must include any stockholder proposals, a board Audit Committee Report, biographical and compensation information for officers and directors, a board Compensation Committee Report, a Compensation Discussion and Analysis, the identification of significant stockholders and the stock ownership of officers and directors.

There are significant concerns and benefits of a public offering.

Concerns and disadvantages include:

• Dilution of control due to the separation of ownership and management (although there are options to remediate this).
• Loss of privacy due to the requirement for total transparency in the reporting of company information.
• A limitation on operating management's discretion to act as certain decisions require board and/or stockholder approval.
• The expense of the initial securities offering and continuing periodic reporting and regulatory compliance.

Benefits and opportunities include:

• An enhanced corporate image and brand identity, increased market credibility and greater public exposure.
• Improved internal financial reporting, forecasting and controls due to the resources required to comply with regulatory reporting.
• A currency in the form of equity offerings for potential ventures, acquisitions of technology or the acquisition of companies to increase value.
• An existing path to public market access for future financings.
• Increased liquidity and cash position.

In summary, the basic considerations outlined here provide a framework for evaluating whether or not to issue public securities.  Other considerations include capital structure alternatives, takeover defense strategies, the internal preparation necessary for an offering, the drafting of a registration statement and the required due diligence process.

Private companies choosing to remain private but access public markets with certain types of offerings must also generally comply with the requirements outlined above.

The landscape is constantly evolving. An example is the JOBS ("Jumpstart Our Business Startups") Act of 2012, which provides for a new category of smaller companies, EGC's ("Emerging Growth Companies"), to have easier access to public markets due to reduced regulatory burdens on the Initial Public Offering ("IPO") process as well as ongoing regulatory reporting requirements.

We at Nperspective understand the challenges companies encounter when considering and executing a public markets transaction and have successfully provided a cost effective infrastructure alternative and expert guidance to many clients with resource constraints, assisting in navigating all aspects of this complex process.