Going Public Without Raising Money?

Leading up to the market crash last year, on average 50% of reverse mergers included a contemporaneous financing, what some in the industry call an APO or alternative public offering. These days that number is much lower. Why do companies go public that are not raising money at the same time?

There are several types. The most common are companies that raised a round of financing just prior to going public from an investor that typically requires that the company go public as its very next step. This approach is good if you have an investor willing to do it. One thing to consider when you do, however, is that the investor typically will request a lower company valuation if they are investing in a company that is not public at the time they invest, even if they go public right after. The reason for this is that it is not certain that the company will complete its going public strategy. But for the company it provides certainty as to the availability of money, as sometimes investment banks and others promising to raise money upon completion of a reverse merger end up not being able to do so (though even then the company’s greatest risk is the expense of the reverse merger, as most companies would not go public unless the financing is completed). Several players have made a business out of providing this “bridge” financing prior to going public.

Other companies that do not raise money when going public are the types that are not really seeking growth capital. Some companies are seeking the other benefits of being public, whether it is to make acquisitions easier, to provide liquidity for investors and entrepreneurs, incentivizing executives with stock options, or seeking the additional public relations benefit of having a publicly trading stock. Some Chinese companies, for example, are very profitable and can finance even growing operations from earnings. But the owners have had no way to “cash out,” even if over time, and the public market provides that.

Last are companies that go public hoping to raise money either in the near future or somewhere down the road. Those seeking money a year or more later presumably have more than enough earnings to bear the costs of being public and to finance their operations. They have a business opportunity or other situation that will need cash later, and they believe (probably correctly) that having been public for awhile makes it easier to raise money a year later than if the company was just going public at that time. Others expect to raise money almost immediately after the reverse merger, believing that it is easier to raise money after being public than contemporaneous with the event. In both cases, the risk, of course, is that they are unable to raise capital for whatever reason when they are ready. In fairness, in a number of situations I have seen companies go public and then raise money as quickly as 4-6 weeks later.

In general I advise companies to try to complete their financing at the time of the reverse merger if possible and if they are able, especially if that is the primary reason for their going public. We also protect the downside where possible by ensuring that the company has no more than 300 shareholders of record (this means people with a physical stock certificate rather than owning stock electronically in an Ameritrade or similar account). If we do that, and the company is unable to raise money and wants to stop being public, a board consent and simple one page filing with the SEC will “de-register” the company’s stock and it will no longer be subject to the SEC reporting requirements. Technically, a market maker could still make a market in the company’s stock on the Pink Sheets in this circumstance, but no more SEC filings or financial statement audits will be required.

So: if you need to raise money down the road, or have many other reasons for being public, then going public without a contemporaneous financing usually makes sense. If you are raising money immediately after, just make sure it is essential to your source of financing that you wait until after you are public to raise the money, and do your best to stay under 300 shareholders of record. In that case, the risk is not substantial. Good luck!

Comments

Leave a comment