Planning on Going Public in Less Than Ideal Economic Times? Consider an IFIPO

by Craig Butler on November 9, 2009

Lets face it, going public when the markets are booming is easy.  Investment bankers are around every corner willing to underwrite your initial public offering so long as the name ends in “.com” (or whatever the next fad will be).  However, for the time being and for the foreseeable future, underwritten initial public offerings are a thing of the past for all but the largest of companies.  And although the economy should show steady improvement over the long run, it will likely be years before we see anything approaching booming markets, at least those booming enough to support underwritten IPOs for small-to-medium sized companies.  So what do you do if you are a fundamentally-strong small-to-medium size company that wishes to go public?  For years the answer was either a reverse-merger with an already publicly-listed company or self-funding your own initial public offering.  However, the latest trend is an IFIPO.  This article discusses the basics and answers many of the frequently asked questions.
What is an IFIPO?
IFIPO stands for “Investor Funded Initial Public Offering” and basically entails raising money from outside investors to pay (and otherwise provide) for the requirements to get from a private company to a public company, including audit, registration statement, 15c2-11, etc.  The concept is not new, it is merely a twist on a self-funding IPO; however, the method and contacts developed by The Lebrecht Group have created a unique, streamlined process to achieve the IPO result.  This process has been labeled an IFIPO.
How does an IFIPO work?
For companies that qualify (see below) the initial step is to contact The Lebrecht Group regarding your company’s desire to potentially go public through an IFIPO.  We will review the basics of your company (business plan, financial statements, market segment, etc.) and conduct an initial screening telephone call with management to determine if your company meets the minimum criteria.  If so, we will determine what type of investor best fits your company’s situation and approach those investors with the idea of funding the work necessary for your initial public offering.  If we are successful in finding an interested investment group your company will enter into a term sheet with the investor(s).  At that time a small amount will need to be paid to our firm to review and reorganize your company (if necessary) to properly prepare it for financing and to go public, as well as to draft the necessary investment documents.  Once the offering is complete and funded your company’s audit will begin while our firm begins working on your registration statement.  Once the required audit is complete, those financial statements are married with the registration statement and the registration statement is filed with the SEC.  Once your registration statement clears SEC comments then a market maker will file your 15c2-11.  After clearing comments on your 211 filing your company will be given a ticker symbol by FINRA and you will be ready to begin trading on the OTC Bulletin Board.  You can expect the process to take 6-9 months, assuming your company is auditable.  If there are issues with your company’s financial statements, or the audit, the process will take longer.
How do I know if my company qualifies for an IFIPO?

Obviously not every private company qualifies for an IFIPO, just as every company is not the right candidate to be a public company.  The purpose of an IFIPO is to give companies that should and want to go public a vehicle to accomplish that goal.  With that in mind, the ideal candidate companies for an IFIPO are those companies that have real operations, are revenue-generating, cash flow positive, and have a strong management team.  An IFIPO is not a vehicle to take a shell company public.  A good barometer is to step back and look at your company through the eyes of a potential investor.  Does your company have the operations, revenues and story to be appealing to potential investors?  If so, your company is likely a candidate for an IFIPO.

How much does an IFIPO cost the company?

While the theory of an IFIPO is that the costs to go public are paid for by funds raised from investors, there are still a few up front costs that must be borne by the company.  Primarily these costs relate to due diligence and clean up of the private company to prepare it for financing and to go public, as well as the preparation of the offering documents to be given to the investors.  For clients of The Lebrecht Group these costs are typically around $20,000 to $25,000.  This amount is paid up front by the company to cover clean up costs and offering document preparation.  Obviously, an offering cannot take place to raise money from investors until the private company has a proper corporate structure and the offering documents are prepared to give to the investors.  After that the purpose of an IFIPO is to raise the money for the company that is necessary to pay the audit and legal expenses to get the company public. 

How does an IFIPO differ from an underwritten public offering?

In an underwritten IPO an underwriter agrees to purchase a certain number of shares at a specified price at the time of the initial public offering (actually just before).  The result is that the company gets X dollars in its pockets in exchange for Y number of shares.  The large infusion of cash is used to fund operations or expansion after the initial public offering. However, an underwritten IPO is not typically priced until just before the initial public offering and the company does not receive the funds until that time.  So the machinations necessary to get to the end of the IPO process are left up the company, many times at a massive expense.  Legal, audit, and other requirements are the responsibility of the company, including the registration statement and the necessary audit.  For most underwritten IPOs these costs total hundreds of thousands of dollars. 

In comparison, under an IFIPO money is raised from outside investors in order to cover the costs of your company’s audit and legal work to get your company public, but not large sums of additional cash to fund operations.  The purpose is to get your company public and then, as a public company, provide access to more funding options to get additional money for operations after your initial public offering  However, under an IFIPO there is no underwriter and there isn’t a big infusion of cash when you go public.  In addition to the structural differences between the two methods, in reality the differences are that underwritten IPOs are almost non-existent and IFIPOs are a vehicle for the numerous companies where underwritten IPOs are not an option.

Who will be my investors?

The answer to this question depends on your company.  If your company qualifies for an IFIPO your investors will depend primarily on your company’s internal stock structure.  If you are a closely held private company with only a few shareholders we will match you with an investor group that will not only provide financing, but also provide you with the equally important requirement to go public – shareholders.  Not just any shareholders; but sophisticated, accredited shareholders who are familiar with small-to-medium sized public companies and the markets in which they trade.  If your company already has an established shareholder base there may be smaller funds or individual investors that will provide financing.

If I am interested in exploring the possibility of an IFIPO what do I do next?

If your company meets the requirements listed in this article and you are interested in finding out more about IFIPOs, contact The Lebrecht Group, APLC at the telephone number below and we will give you more information and find out more about your company to see if your company qualifies and, if so, start the process.

* * *

The Lebrecht Group, APLC provides comprehensive advice on a variety of corporate and securities law matters.  Please contact us if you have any questions.

To view other articles written by Mr. Butler, please follow this link or cut and paste it in your Internet browser: http://www.thelebrechtgroup.com/index.php/publications/tlg-publications.

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.

 

Previous post:

Next post: