Investment & Financial Articles
Title: The Cost of Going Public in the United States
Author: William Cate
Article:
The Cost of Going Public in the United States By William Cate
[http://home.earthlink.net/~beowulfinvestments/] From Equity
Finance Solutions March 2000
The following data is taken from "Going Public" by James B.
Arkebauer (1994) and the IPO cost website at:
http://www.intranet.ca/~tgil/p2.html You should keep in mind
that costs vary based upon the complexity, the size of the
underwriting and the history of the private company. The
following IPO costs would be reasonable for a company with over
$2 million in gross revenues and a 3-5 year operating history. A
startup company would pay less than half this estimate to do an
IPO. In some cases one or both sources acknowledge a cost listed
below, but fail to offer an estimate. In those cases, I've
supplied an estimate based upon my IPO experience.
Pre-IPO Costs$300,000 Legal Costs$175,000 Accounting$80,000
Printing & Mailing$100,000 Translation$30,000 Market Prep
Costs$90,000 Investment Bankers$50,000 Consultants$50,000
Moody's or S&P$6,000 Blue Sky Fees$20,000 (California only)
Transfer Agent$2,000 Mgnt. & Admin.$200,000 SEC Filing Fee$5,000
Taxes$15,000 (Estimated) Total$1,123, 000
Underwriting Costs
The underwriting cost is a function of the money raised in the
IPO. The NASD allows up to 18% in costs. If the gross revenue
from the IPO is $10 million, this is an underwriting cost can be
as high as $1.8 million.
Here's how the costs breakdown:
Non accountable Expense 3% Accountable Expense 5% Discount 10%
The Company insiders are often required to supply IPO buyers.
The norm is the company insiders' supply 50% of the IPO buyers.
I've seen ranges of required buying from10% to over 100%. The
Client Brokerage Commission is often 5% on IPOs. It's paid by
the brokerage firm client and doesn't affect the money received
by the company.
These costs rise by about six percent per year. As long as the
present Bull Market persists, these costs will continue to rise.
There are ways to reduce these costs. I offers one alternative
at [http://home.earthlink.net/~beowulfinvestments/]
Relatively few companies seek practical advice about the equity
process. They rely on their attorneys, auditors and underwriters
for help. This practice contributes to the fifty- percent
failure rate among companies seeking to do an IPO. Taking a
company public in the States is a costly project. You can cut
your costs by using alternatives to doing an IPO. But, the costs
remain high.
Seek to go public based upon flat fees, not hourly rates. This
limits your risk to the agreed upon fees. Find someone who can
package the entire registration and listing service for you.
It's always cheaper to buy the complete service rather than the
individual parts. The supplier is taking several companies
public and gets better prices from professionals for their
services.
It's less costly for a non-American company to go public in the
States than for any U. S. Domestic Company to become a U.S.
public company in America. The money savings relate to lower
levels of legal responsibility for the filing attorney doing a
20F filing rather than an SB2 filing. The non-American company
can use an auditor and an audit method that is accepted in their
local country. This saves money over paying an American
Accounting Firm to do a GAAP audit.
There are other savings for non-American companies trading in
the United States. They include the fact that the SEC does not
require quarterly filings (called 10Qs), nor is an annual
shareholders report or meeting. I believe that clear, concise
communications with shareholders is vital. I believe that both
positive and negative information needs to be shared in a timely
manner. I doubt the SEC requirements for 10Qs and shareholder
reports is the most cost effective way to achieve these goals.
Historically, the Over-the-Counter and Over-the-Counter Bulletin
Board (OTCBB) are the easiest and cheapest places to list your
shares. This market has a bad reputation. My advice is seek to
list your shares on a Regional Stock Exchange as soon as your
company meets the regional stock exchange's listing requirements.
Epilog: Since March 2000, the Enron, Tyco International and
WorldCom stock scandals have driven the cost of doing a GAAP
audit upward. Inflation continues and the cost of doing an IPO
has risen substantially in the past four years. (5/04) You can
contact William Cate at the Beowulf Investments website:
[http://home.earthlink.net/~beowulfinvestments/]
About the author:
He has been the Managing Director of Beowulf Investments
[http://home.earthlink.net/~beowulfinvestments/] since 1981 and
is the Executive Director of the Global Village Investment Club
[http://home.earthlink.net/~beowulfinvestments/globalvillageinves
tmentclubwelcome/]
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