What is Going Public ?

Going public means offering your securities to public investors for the first time, an initial public offering or IPO.

The securities laws of the United States provide that companies selling securities to the public for the first time must register with the Securities and Exchange Commission, the SEC.

Generally, a company going public finds and investment banking firm called an underwriter to sell its securities to the public.

Companies can also go public by making a self-registration, filing with the SEC without an underwriter.

For the most part, companies raise money when they go public by selling new stock to the public investors. They may also assist existing prior shareholders in the company to sell stock to the public by registering that with the SEC as well. The proceeds of the sales by existing shareholders do not go to the company. Some companies go public only by registering stock for existing shareholders without raising any money for the company.

Going public imposes new levels of responsibility to shareholders. Management must report periodically to shareholders on the business and financial condition of the company. If they are registered under the Securities and Exchange Act of 1934, they must abide by those rules. Those rules cover trading of the stock in the public market after the company goes public.

Forced to Go Public

The Securities Exchange Act of 1934, in Section 12(g) requires that a company register its securities with the S.E.C. if it has total assets exceeding $1,000,000 and a class of equity security held of record by five hundred or more persons. An SEC rule has raised the $1 million limit to $10 million.

The 500 person requirement is for shareholders of record. According to the SEC a shares are held of record if they are held by a person who is identified as the owner of such securities on records of security holders maintained by the issuer.

However, shares can also be held beneficially. Beneficial shares in public companies are held of record by a third party, usually a broker, on behalf of the shareholder. Most brokers use Cede & Company, the nominee of the Depository Trust Company clearing house, for their record ownership of stock.

SEC rules also state that if the company knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of the Securities and Exchange Act, the beneficial owners of such securities shall be deemed to be the record owners thereof.

Even if a company is required to register under these rules, it is not required to conduct an initial public offering and sell new stock to the public. It simply has to start to reporting to the SEC, filing quarterly and annual reports along with other items. Audited financial information is required.

If a company exceeds the 500 shareholder and $10 million limits, it is required to start reporting within 120 days of the last day of its fiscal year it exceeded these amounts.

Alternatives to an Initial Public Offering

There are other ways to get your stock trading in the public market without making an IPO. The most prominent of these is the reverse merger.

In a reverse merger, the private operating company is acquired by a trading public company with little or not business, called a public shell. This is called a reverse merger because the small shell company is acquiring the larger private operating company.

After the reverse merger, the private company now has publicly trading stock. If the public shell was an SEC reporting company, the SEC requires that information on the combined company be filed immediately so that there is full information on the company available to investors.

If the public shell was a non-reporting company trading in the Pink Sheets, no formal level of disclosure need be filed, although it we strongly recommend it.

The SEC has wide power to stop trading in a stock that is trading in such a manner as to suggest that the public may be injured. Having a high degree of trading activity and price movement in a company where there is not sufficient information in public hands strongly suggests that the public is being injured and the SEC is likely to suspend such a stock.