The Isolated Offering – July 2011

(The PCAOB Proposed Changes to Form and Content of Audit Report and Other Changes)

Under the guidance of James R. Doty, Chairman of the Public Company Accounting Oversight Board (the “PCAOB”), the PCAOB has established a policy agenda designed to enhance the relevance, credibility and transparency of audits. In support of its policy agenda, on June 21, 2011, the PCAOB issued a concept release regarding potential changes to the auditor’s reporting model. According to Chairman Doty, this new project is “about what information investors want from audit reports in the future, and how audit reports can be more useful to society. It’s about how audits can provide investors more insightful assessments of management stewardship.”

Contemporaneous with the June 21, 2001 release, each of the five PCAOB Board members issued public statements for the purpose of underscoring the importance of the project. Of particular note is board member Lewis Ferguson statement:

“This project was undertaken in response to what appears to be a fairly widespread dissatisfaction on the part of investors and other financial statement users with the current form and content of the auditor’s report. This dissatisfaction is not new but, as the concept release states, has been expressed by financial statement users for decades. The current auditor’s report provides a general level of information for investors and financial statement users – that the issuer’s financials statements and footnote disclosures are presented fairly in all material respects. Unfortunately, this pass/fail model does not provide the types of specific information that investors and other financial statement users are seeking. [We] believe that the auditor’s reporting model can be improved to provide additional information of the type sought by investors and other financial statement users without inappropriately compromising management’s primary responsibility for conveying financial information to the public.”

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Many of this firm’s clients are public companies.  Most of the work we do involves either taking companies public, or assisting them with SEC compliance issues once they are public.  We believe there are tremendous benefits to being a publicly traded company.  But as a private company, before you jump off that cliff to being public, here are five questions you should ask yourself.

1. Is third-party funding an absolute must? When? Many of the traditional financing sources, such as PIPEs and small underwritings, are hard to obtain in today’s market.  Traditionally, public companies had more opportunities for financing than private companies, and while this still is likely the case, if you must have third-party financing right away in order to carry out your business plan, you should expect it to take longer and cost more than previously.

2. Can I afford it?   While estimates of the total cost of being public vary, for most smaller companies it is approximately $200,000 per year.  This includes lawyers, accountants, and investor relations advisers that aren’t an expense while you are private.

 3. Can I handle the pressure?  In today’s environment, an officer or director of a public company can expect to have detractors ranging from critics to all out bashers on the Internet. And that doesn’t even cover the fact that your salary, benefits, and net worth (at least as it is tied to the company’s stock) are all publicly available.

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