Saturday, November 8, 2014

The True Cost of being a Publicly Traded Micro Cap Company or Penny Stock

If you believe the hype on the Internet, an IPO (or taking your company public) is the answer to all of your company problems.  You will get boat loads of cash, investors will our in from all over the world and the prestige you gain from being listed on a stock exchange will make your email inbox fill up with offers to sit on other company boards.  Maybe....

The truth is that in the micro cap sector, this is rarely the case. If you are a start-up or a company looking for financing, you will probably run into a consultant that advises you to reverse merge or take your company public by listing over-the-counter on an exchange such as OTCMarkets. They may show you some success stories and proclaim that financing is easier to come by when you are listed publicly.  Be wary....

The true cost of going public is one of countless expenses that a company should factor before taking the plunge.  A quick search on the Internet will have you believe that you can list your company on a stock exchange (either in the USA or abroad) for $60,000-$100,000.  This may be true, but this is just the start of an on-going expense list that CEOs and managers should be aware of before making the decision to take a company public, especially as a penny stock.  The true cost of going public includes but is not limited to:

  • Filing Fees with The Stock Exchange: Depending on where you list your company, the fees vary as well as the requirements.  Over-The-Counter exchanges often have less nominal fees than the major stock exchanges such as NYSE or NASDAQ and often times (depending on what tier you list) will not have disclosure requirements.  
  • Professional Fees associated with an IPO or Reverse Merger: Lawyers, Accountants and "Consultants" are all part of the mix when going public.  Normally an Attorney will have to file your paper work with the SEC and your company will need an audit from a professional accounting firm.  
  • Investor Relations Fees: A good IPO or Reverse Merger will need a strong Investor Relations teams to introduce the company to Investment Bankers, Broker Dealers and handle Press Releases and "Road Shows".  These companies can charge between $5,000-$15,000 per month and some of the best IR Firms want equity or stock options which can amount to in excess of 10% of your company.  
Now these fees vary but if paid at once, which is advised, they quickly add up to $100,000-$200,000 depending on the size and notoriety of the firms hired.  Keep in mind that all these fees are before you become public or raise money such as in a traditional IPO.  Micro Cap Companies and Penny Stock IPOs are significantly different than the average IPO on NYSE, for example, the investment bankers and broker dealers commonly do NOT buy the stock pre-IPO and rather buy the stock at a discount after the company has gained liquidity on the public markets.  This is often a conundrum because liquidity is formed when multiple buyers and sellers are in the market and many penny stocks and micro cap companies begin trading over the counter with minimal to no shareholders.  

So now your company is public...and the fees listed above will continue.  The (1) Filing Fees with the Stock Exchanges come quarterly or annually (2) Professional Fees continue monthly whenever the company needs to make an important disclosure or file quarterly reports and (3) Investor Relations fees are billed monthly.  (Often times Investor Relations fees include warrants, stock options, or common stock in the trading company; these form of "fees" cause downward pressure on the stock when the IR Firm goes to "cash-out" of their position, thus increase the true cost of the IR Firm)

If the only reason you are considering an IPO or Reserve Merger is for easier access to financing, please reconsider.  Especially in the Micro Cap Market and Penny Stock Market, financing can also be more difficult than in Private Equity.  In most over-the-counter markets for example, the purchaser of your company stock must be an "accredited investor" thus limiting the pool of investors to those classified as "accredited" by the SEC.  In these situations, you actually do not have access to the "public" markets but rather to a select few groups or individuals of high net worth.  

If you are not well versed in the public markets, the best advice is to take it slow and ask many professionals in the industry for their advise.  Keep in mind their biases (a lawyer for example will most likely always tell you that you need an Attorney for certain filings when in fact this may not be the case).  If you can afford it, hire a third party outside consultant whom will make sure that every move is the best for you and your company-even if it means you do not take your company public.  

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About the Author: Nicholas Coriano, JD is an Entrepreneur &  Business Consultant.  He has worked at Merrill Lynch, The New York Stock Exchange and is currently a partner at Cervitude Intelligent Relations.  Learn more about him here. He is the author of Rules For Entrepreneurship available now on Amazon.

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, If you would like to advertise on The Blog, click here


  1. This article is so true - as a company that provides "go public" projects, we advise more companies not to go public than to go public.

    1. That is great to hear Robert, I have seen so many advisers preach that going public is the best and easiest way to raise money for your company, this is simply just not true. Most times staying private is better valued for a client (a client with no revenues especially). In today's age, there are plenty of platforms to raise financing as a private company and all options should be considered before taking the plunge into a costly IPO.