Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Wednesday, July 24, 2013

Going Public Question & Answer


Ask Securities Lawyer 101 l Going Public
Going public is a big step for any company.   The process of “going public” is complex and at times precarious. While going public offers many benefits it also comes with risks and quantities of regulations with which issuers must become familiar.  Despite the risks even in a down economy, the U.S. markets remain an attractive source of capital for both domestic and foreign issuers.
Going public is a complicated & intricate procedure, and it is important to have an experienced securities attorney to help your company navigate through the process and deal with the Securities & Exchange Commission the (“SEC”),Financial Regulatory Authority (“FINRA”) & Depository Trust Company(“DTC”). Upon completion of a going public transaction, most companies are subject to the regulations that apply to public companies, including those of the Securities Act of 1933, as amended (the “Securities Act”) and Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Q. What does it mean for a company to go public?

A. Going public often refers to the process of a company filing a registration statement with the SEC to register its securities and become an SEC reporting company.  Other times going public may mean the filing a Form 211 with FINRA to obtain a ticker symbol for quotation on the OTCMarkets OTC Pink Sheets without filing a registration statement with the SEC.
Q. Why do most companies go public?
A. Most companies go public to raise money.  It is much easier for a public company to locate capital than it is for a private company.  Funds raised in going public transactions can be used for working capital, research and development, retiring existing indebtedness, acquiring other companies or businesses or paying suppliers.
Q. What are other advantages of going public?
A. Numerous additional benefits come with public company status.  Among them are:
 Once a going public transaction is complete, the company will be able to use its common stock as a form of currency and as collateral for loans.
 Going public creates value for an issuer’s securities.  Going public also creates liquidity for existing and future investors, and provides an exit strategy for shareholders and/or investors. Additionally, public company stockholders may be able to sell their shares or use them as collateral.
 Public companies have greater visibility than private companies. It is easier to build recognition of a public company than a private one. Publicly traded companies are often promoted and gain publicity from their status as a public company.  Further, the media has greater economic incentive to provide coverage of matters concerning public companies than private companies  because of the number of shareholders and investors seeking information about the company.
 Going public may allow a private company to attract more qualified employees and key personnel, such as officers and directors because it allows the company’s management and employees to share in its growth and success through stock options and other equity-based compensation.
• There is a certain amount of prestige associated with public company status or service to a public company.
Q. What are the disadvantages of going public?
A. The disadvantages to going public include:
  Going public requires management to answer to shareholders and give up a certain amount of their control over company matters.
 Going public is expensive and staying public is expensive. Legal, accounting and compliance costs are significant and these costs will have to be paid regardless of whether a company raises capital.
•  After a going public transaction, a newly public company will incur higher costs as a public company, including auditing and legal expenses and costs of compliance with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).
 Public companies are subject to more scrutiny than private companies.  Once a company becomes public, certain information must be disclosed to the public, such as executive compensation, financial information, previous violations of the securities and other laws and material agreements must be disclosed. Public companies operate under close scrutiny as well as oversight.
 SEC reporting companies must comply with reporting requirements under the Exchange Act as soon as their going public transaction is complete.  Complying with these reporting requirements is costly and time consuming for management.
 Going public also exposes the company and its management to liability for false or misleading statements in filings and reports filed with the SEC.
Q. What is the difference between filing a registration statement under the Securities Act and filing a registration statement under the Exchange Act in a going public transaction?
A. Filing a registration statement under the Securities Act registers an offering of securities.  Shares registered by the issuer or on behalf of  itsselling shareholders who are not affiliates of the issuer generally are unrestricted securities.  Filing a registration statement under the Exchange Act registers a class of securities such as common stock. Registration under the Exchange Act does not register a securities offering and does not create unrestricted securities.
Q. What is DTC eligibility & why does my company need to be DTC Eligible? 
A. The DTC serves as the only custodian of  securities for its participants, which include broker-dealers. DTC is also the only securities settlement provider in the U.S. If an issuer’s stock is DTC eligible, DTC will hold an inventory of free-trading street name shares on deposit. These free-trading shares are also  known as the “public float.”  Without DTC eligibility shares can only be publicly traded if there is physical delivery of a stock certificate and payment between a buyer and seller. Without DTC eligibility, it is almost impossible for a public company to establish an active tradign market in its securities.
Hamilton & Associates has extensive experience in all aspects of securities law and going public transactions including SEC registration statements on Form S-1, direct public offerings, domestic and international stock exchange listings and quotation on the OTCMarkets.

This informational memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or please contact Hamilton and Associates Securities Lawyers. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney

101 Plaza Real South, Suite 201 South
Boca Raton, Florida 33432 
Telephone: (561) 416-8956
Facsimile: (561) 416-2855

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