Friday, February 4, 2011

Will the Cost of The Shift to Private Placement Go Public?


Companies that could have an IPO in the legal sense of the word are opting the private placement route. Some examples may be seen recently with Facebook or LinkenIn whom have chosen to be listed on a Second Market, a marketplace alternative investments[1], which provides a means for raising capital through equity, debt, and other models. As of lately there are pressures to force these companies to opt the public route due to convolution in the difference between the legal term “private” and “public”.

Compare the cost of going public on different exchanges and you will find the spread rather large. The transaction cost can vary from $100,000 to half a million for listing on the over the counter markets (pink sheets, otc, otcbb) to upwards of five to ten million for listing your company on a major exchange (NYSE, Nasdaq, London). The regulation and legal compliance cost are also significantly greater with the larger exchanges leaving corporations to employee adequate human resources to deal with issues in; securities litigation, securities taxation, and legal entity forms, whether through the “main” entity or subsidiaries. Some would argue that these fees are indicative of why companies as of lately have opted the cheaper route of staying private; not listing and setting up alternate forms of equity investments i.e. partnerships, LLC, LLP, etc

The preferred legal entity for the earlier of the last 100 years has been Corporate form, entailing a company to incorporate by filing their article of incorporation with the Secretary of State. The same is entailed in other legal entity forms, with the exception of some sole proprietorships and partnerships. In so far as securities are concerned the major legislation which has generally controlled, have been the The Securities Acts of 1933 and 1934, with exceptions to certain repeals and amendments. The Uniform Limited Liability Company Act, which controls, as far as form, the limited liability company, was established in 1996[2]. The States in the years following have put into law, in various forms, their own versions of these Acts which generally govern private entities such as LLCs and partnerships[3] opposed to public entities.

The case law, which lawyers will eventually adhere to, are still in the pipeline.

Some say that there is a force that pushes private companies public...true. There is a direct correlation between the amount of capital raised and regulation. If the company is not proactive in self regulation, the pressures come from the S.E.C. and other regulatory agencies for disclosure[4] and in essence a safer investment. SecondMarket CEO has been on CNBC as of lately discussing the offerings of several companies and their terms, noting that all investors who choose to invest are considered to be sophisticated investors[5]. This terminology and situation is new to the non corporate structure in a field of law, securities, which is in desperate need of revision.

In the mean time, the shift is on and we will see an interesting mix of financing obtained at a cheaper rate now, and the costs for the unknown in the future.

Please feel free to weigh in….if you’re a sophisticated investor….

-The MicroCapCompany Team
Follow Nicholas Coriano on Twitter

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About the Author: Nicholas Coriano is a Business Consultant and Planning Guru.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and as an Investor Relations Agent & Consultant to Micro Cap Companies and Penny Stocks.  He is the founder and author of The MicroCapCompany.com a blog focused on providing information and advice to Micro Cap Company Executives and Investors.  You can also find him blogging about Social Media, SEO, Web Development and Tech on PushYourRank.com

About MicroCapCompany.COM: MicroCapCompany.COM (The Blog) is a blog focused on providing articles, news and information on the micro cap sector and start-ups.  The Blog is a free service offered by Cervitude™ Investor Relations (a micro cap investor relations firm) and offers compensated research reports and business plan writing services for micro cap companies and penny stocks.  If there is a particular topic you would like to see covered on The Blog, email CervitudeNetwork@gmail.com, If you would like to advertise on The Blog, click here

[1] www.secondmarket.com
[2] The “Act” was revised in 2006
[3] See “The Uniform Partnership Act” (1997)
[4] Facebook Sets Stage for IPO Next Year http://online.wsj.com/article/SB10001424052748703730704576066162770600234.html
[5] Sophisticated investor-A term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk investments including seed money, limited partnerships, hedge funds, and angel investor networks. The term generally includes wealthy individuals and organizations such as a corporation, endowment, or retirement plans. In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million US dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year.

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