So you have already decided why to go public and are yearning to take the next step. Wait! Before you take the plunge, make sure you are aware of the costs of going public.
The costs associated with taking a company public are significant. The majority of the costs incurred during the IPO process are reflected as a reduction in the amount of additional paid-in capital generated by the offering. If the IPO is not completed or is postponed for a period of more than 90 days, all these costs are charged to expense.
The underwriters’ discount, or commission, can range from 6 to 9 percent of the public offering price of a new common stock issue, with 7 percent of the offering price being the most common. In smaller offerings, some underwriters may request other compensation, such as warrants, the issuance of stock to them at a price below the public offering price, a right of first refusal on future offerings or reimbursement for their counsel’s fees or other expenses.
The SEC will not declare a registration statement effective until the National Association of Securities Dealers (NASD) has approved the underwriting arrangements. Part of NASD’s review is to consider whether the fees charged by the underwriter are reasonable.
In addition to the underwriters’ commission, an IPO involves out-of-pocket expenses that are incurred regardless of whether the offering is successful.
Because each offering’s facts and circumstances vary, the resulting out-of-pocket costs vary. If problems or unexpected circumstances arise, the costs can increase substantially. Out-of-pocket expenses of going public cover a range of activities, including those discussed below.
Legal fees vary considerably with the circumstances and generally include the following:
- Corporate “housekeeping” work related to the offering
- Preparation of the registration statement
- Negotiation of the underwriting agreement
- Closing of the sale of securities to the underwriters
Charges allocated to “housekeeping” are usually treated as current business expenses for accounting purposes.
The legal fees are usually higher if there is a large number of selling shareholders because of the legal and administrative work required for each seller. Legal fees are also usually higher for offerings that present complex legal issues. Your public company may also agree to pay part of the fee for the underwriters’ counsel.
Accounting & audit fees
Accounting and audit fees depend on your company’s size and the complexity of your operations. Fees may be lower if your accountants have conducted regular audits for the past few years and have completed the audit of the current year.
Fees may be somewhat higher if your company is required to include interim audited or unaudited financial statements in the registration statement, and significantly higher if there are no prior audits. Accounting fees may also be higher for offerings that present complex accounting, auditing or tax issues. Additionally, if separate financial statement audits of businesses acquired or to be acquired are required, the accounting fees will be higher. The accountants’ fees include the following:
- Audit of the financial statements
- Review of the registration statement
- Assistance in responding to SEC staff accounting comments
- Preparation and delivery of the comfort letter to the underwriters
These fees are treated as a period expense and cannot be deducted from the proceeds generated by the offering.
These costs cover printing of the registration statement, the prospectus, the stock certificates and the underwriting documents. The registration statement and prospectus account for the largest portion of the printing expenses, which are governed by the length of the prospectus, the number of prospectuses and the number of corrections.
Infrastructure & other costs
Many growing companies require additional competencies in order to staff an accounting and finance function for a public company. The costs for building the required staff, including the corporate governance and internal control infrastructures, depend on the size and complexity of your company.
Other miscellaneous costs are associated with the process of going public. These include SEC and NASD filing fees, which are based on the size of the offering, blue sky filing fees and registrar and transfer agent fees. There are also fees for listing with any of the national securities exchanges.
Still interested in taking your company public now that you are aware of the high costs? Re-evaluate your goals to determine your answer, Going public can certainly be worth the efforts as many people in the industry will tell you.
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