This article is the second in a series of two articles, the first of which originally appeared in the June 2010 issue of The Isolated Offering. The first article (which can be found here: Click for Part I ) discussed the current financing opportunities that public companies have available over private companies, which is the primary reason many smaller companies are currently considering going public. This second article takes a look at the costs for a private company to go public and then the cost of being a public company, so companies considering going public to take advantage of certain financing options can determine if the possible financing options are worth the price of being a public company. It should be noted that these articles are not meant to encourage private companies to go public merely for the financing opportunities, nor is it meant to discourage companies wanting to go public from going public due to the costs involved, but are merely meant to inform companies in those situations so they can determine if becoming public company is worth the cost of being a public company.
It should be noted the legal costs referred to in this article are the costs charged by The Lebrecht Group, APLC; the charges for the other services are estimates based on what we typically see in the space. Certain charges, especially for audit fees, will differ depending upon the various factors, primarily the nature of the business of the company and the location of the business and its operations.
How much does it cost to go public?
For the purpose of this article, we are going to assume that companies are going public one of two ways, either a direct initial public offering (“Direct IPO”) or a reverse merger. Under a Direct IPO a company with the requisite number of shareholders files its own registration statement with the SEC to register its common stock, then a 15c2-11 with FINRA to get on either the OTC Bulletin Board or another exchange, and then applies for DTC eligibility. In a reverse merger a private company merges with an existing public company resulting in the private company becoming a publicly-traded company. There are other ways to go public, such as an underwritten IPO (a traditional IPO), but since most smaller companies do not go public in these ways this article will only focus on the costs associated with the above two primary methods of going public.
Audit Fees. Under both a Direct IPO and a reverse merger, the audit fees will be similar. In both situations the private company is required to have its financial statements for the last two fiscal years audited by an independent, registered accounting firm qualified with the Public Company Accounting Oversight Board (PCAOB), as well as have any stub periods since the end of its last fiscal year reviewed by the independent auditor. In situations where the company has not been in existence for two years, the company is required to provide audits and reviews for the period of time the corporation has been in existence. As mentioned above, these audit fees will vary company to company and audit firm to audit firm, but a good benchmark for a company’s 2 year audit is about $40,000 to $60,000, with the review of the applicable stub period costing an additional $5,000 to $7,500. Most auditors will also have a separate fee for reviewing the registration statement that will contain the audited and reviewed financial statements. This fee is typically between $2,500 and $5,000. Therefore, all told, a private company looking to go public through either a Direct IPO or a reverse merger should allocate around $50,000 to $75,000 for the audit, review of the stub period and review of the registration statement. Again, this could vary greatly based on many factors. Also, companies should keep in mind there may be costs associated with either preparing the company’s financial statements for audit and/or hiring experienced personnel, such as a Chief Financial Officer or controller, familiar with public company accounting.
Legal Fees. Under a Direct IPO, the legal fees are as follows (again, using The Lebrecht Group’s current fee structure), due diligence and corporate clean-up (~$5,000), S-1 registration statement, including drafting, filing and responding to comments ($40,000), 15c2-11 filing with FINRA, including drafting and comment responses ($6,000), miscellaneous filings, such as Section 16 filings, Forms 13G/13D, etc. (~$5,000). Therefore, the legal fees for a Direct IPO are around $55,000-$60,000, if the company has an existing shareholder base of around 100 people. However, if the company does not have sufficient shareholders and needs to undertake an offering of its common stock to get additional shareholders the necessary private placement memorandum will cost an additional $15,000.
For a reverse merger, the fees are much more transaction-driven since the reverse merger transactions can take a variety of structures. However, a good benchmark is as follows: private company due diligence and corporate cleanup (~$5,000), review of potential shells (~$2,500 each, prepare for 2-3 review at least as rarely is the first shell found the one that is used), preparation and completion of reverse merger transaction documents (~$10,000), post-merger “Form 10” 8-K ($24,000), and miscellaneous filings, such as Section 16 filings, Forms 13G/13D, etc. (~$5,000). Therefore, the legal fees for a reverse merger will likely also be around $55,000 to $60,000.
Other Fees. Obviously, for a company that goes public via a reverse merger there is likely going to be one additional large cost, and that is the cost of the shell. While prices for shells vary greatly, for most you can assume a price in the range of $200,000 in cash for a “clean” OTCBB shell and around $75,000 to $100,000 for a clean Pink Sheet shell. In addition there are a variety of other fees that companies should account for, such as transfer agent fees, registration fees, etc. For the sake of this article, most companies should allocate at an additional $5,000 for this purpose.
Based on the above, the cost to go public through a Direct IPO is approximately $100,000 to $120,000, and for a reverse merger, this same amount, plus the cost of the shell, so anywhere from $175,000 to $325,000.
How much does it cost to be a public company?
Once a company is public there are obviously costs of being a public company. The costs listed below are estimates and assume the company is a ’34 Act reporting company. The following is a breakdown of the basic costs.
Legal Fees. The legal fees for public companies are best split into two categories: annual compliance fees and additional fees. Annual compliance fees for public companies are those fees associated with a company filing its annual report on Form 10-K ($10,600) and its three quarterly reports on Form 10-Q ($3,600 each), totaling $21,400 per year. Additional fees are the other legal fees incurred by public companies for other required filings, but not filings that are required to be at regular intervals like the compliance filings. The additional filings can include filings such as registration statements (S-1 = $40,000), information statements (14-A or 14-C = $10,400), current reports on Form 8-K ($650 each unless related to an acquisition), Section 13D/13G filings ($650 each), Rule 144 legal opinions ($500 each), and Section 16 filings ($400 each). Between the compliance fees and the additional fees, public companies average approximately $35,000 to $45,000 a year in legal fees, unless they have a number of complex transactions, such as mergers and/or acquisitions, in which case the fees will be higher.
Audit Fees. As mentioned above, the audit fees for public companies vary widely depending on many factors, but a good estimate is $40,000 to $50,000 for the year end audit, and $6,000 to $7,500 for each quarterly review, for a total of about $60,000 to $75,000 per year. If the company undergoes certain transactions, like an acquisition or files a registration statement, additional audit fees will be incurred.
Other Fees. Public companies have a variety of other fees they will incur as a result of being a public company, such as transfer agent fees (~$2,500 annually), D&O insurance fees (~$5,000 – $10,000 annually), edgarization fees (~$5,000 annually), as well as some fees that the company may elect to incur, such as investor relations/public relations (~10,000 annually).
Based on the above, a good estimate of the cost to be a public company, once you’ve gotten public, is $125,000 to $150,000 per year. Obviously, this can vary greatly, but I believe this is a good benchmark to start with for companies trying to determine if they want to become a public company.
Are the possible financing options available to public companies worth the price of being a public company?
That depends on a numerous factors and is a determination to be made by the Board of Directors of any private company considering going public. However, for the purpose of this two article series, there are a few important considerations to keep in mind when making the decision to go public. First, as forth herein, the cost to get public through a Direct IPO is approximately $100,000 to $120,000, with a reverse merger costing about $75,000 to $200,000 more depending on the cost of the shell. Second, the cost of being a public company is approximately $125,000 to $150,000 per year. Therefore, assuming your company is a proper fit to be a public company in the first place (has real operations, revenues, etc.) and you are considering going public due to the potential financing options available to public companies that aren’t available to private companies (see Part I in this article series), you need to make sure that you are able to afford the costs of going public and being a public company; and your company is a good, solid company with a good story to tell and are willing to pay for a quality investor relations/public relations firm, since stock liquidity is the key to accessing the alternative sources of financing available to small public companies. If your company doesn’t have a good story to tell, or is unwilling to pay to get the story told, then those financing sources will be difficult for your company to utilize.
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The Lebrecht Group, APLC provides comprehensive advice on a variety of corporate and securities law matters. Please contact us if you have any questions.
Craig V. Butler, Esq. is an attorney with The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. He can be reached at (949) 635-1240 or via e-mail at cbutler@thelebrechtgroup.com with questions or comments. Please visit our website atwww.thelebrechtgroup.com for future updates and other information.
