Since there is not an individual or a business currently in existence that possesses access to unlimited financial resources, whenever one decides to get involved in business; the question of obtaining finance must come to the fore. This is true regardless of which culture you are situated in or whichever corner of the globe you reside. One may not only be seeking funding to raise start-up capital; one may also be considering the expansion of an existing business operation.
Several avenues can be explored when seeking funding for business activities/operations, which includes debt financing/capital, venture capital and Equity capital/Financing, grants etc.
With growing restrictions on loan criteria due to bad debts and fraud, debt financing which largely deals with borrowing of finances from financial institutions have been seriously impeded. The same can be said about Venture Capitalists in regards to its decline in recent times that may be as a result of the global economic meltdown. Research from NESTA, the National Endowment for Science, Technology and Arts suggested "the money raised by venture capital funds plummeted 70 per cent last year compared to 2007". Another reason for going public might be in keeping with contractual arrangement negotiated by venture capitalist involved in the company's growth.
More and more companies are finding equity financing appropriate to fund their business operations. According to Gitman (2009) Equity Capital is "the long-term funds provided by the firm's owners, the stockholders". With that definition in mind one can clearly see why companies will want to sell as much stock (shares) as possible at the best price possible as it directly affects the amount of finance that can be obtained for business operations. However to attract widespread stockholders (shareholders), the company must "go public" which is what we will be discussing intricately in this paper.
What is Going Public?
When we say "go public" we can be addressing several things however for the purposes of this paper "going public "will speak to the process whereby companies offer their shares or stock for sale to the general public. A share/stock according to Investopedia (2010) is "A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings."
Whenever a company undertakes this process; that company is rendered a "public Company" as oppose to a company that sells it shares to a selected few which is the case with "Private Companies". Shareholders in a public company do not have to be friends with or even like the management team of the company invested in.
For companies to go public, they are first registered with a Security Exchange which is the institution that provides the opportunity for the company to trade with the general public and vice verse. One a member of the general public has the required amount of money and there are shares available for purchase, he or she can become a shareholder of that company.
As a company, when you go from one security(stock) exchange to another, the obligations required for registration by that exchange may become more or less stringent than the other which may affect the cost of preparing your company for registration and its initial public offering (IPO) at any given security exchange.
Both limited liability partnerships and Incorporated Businesses are able to go public. Basically going public can be accomplished in two ways, via an underwriter and secondly via a reverse merger which is where a privately own company sells its shares to an underwriter or shell, for preferential shares and share percentage in the new public company being formed.
Here are the general steps however that is involved in the process of a company registering to go public.
Step In Going Pubic
A professional accountant or accounts must be hired by the company to examine and ascertain the true financial status of the business that wishes to make a public offering. This step is critical as the value of the company will play a significant role in the valuing of its publicly traded stock. Credible management should also be in place as well as a strategic business plan.
A professional corporate attorney or attorneys must also be hired at this stage of the process to ensure the aspiring company is aware of the rules and regulations that govern the act of publicly trading shares in the jurisdiction in question.
After this an investment Banker is engaged to undertake the process of underwriting. "The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities" is called underwriting according to Investopedia (2010). The purpose of the investment banker is not only to underwrite or negotiate the purchase of securities issued by the business that is going public, additional the investment banker usually stand security for shares being offered to the public and serves as an agent for advertising the public offering as well. At times more than one Investment banker/ brokerage firm can come together to form what is called an "underwriting syndicate" to underwrite massive companies.
After weighting the pros and cons of that particular business in regards to going public; thereafter, the underwriters/Investment Bankers produce a preliminary document referred to as the "Red Herring" which is a prospectus of the amount of shares and share price available to the general public for consumption.
Potential investors which may include the general public, other firms, governments etc are now ready to purchase shares in your public company.
Stock (Security) Exchanges can be found on almost every continent on planet; ranging from the well known stock exchanges like Wall Street and The New York Stock Exchange to the newer and less known Eastern Caribbean Securities Exchange and others right here in the Caribbean. In Grenada; The Republic Finance and Merchant Bank Limited (FINCOR) acts as the leading investment banker/brokerage firm available to companies wishing to go public.
Pros and Cons from Going Public
By going public, a firm is able to position itself to improve its financial condition with funds that not borrowed to be paid back. Apart from the firm's ability to easier access of capital, the creator of the firm may gain higher reputation and positive publicity with a potential increase in liquidity from their investment. The previously mentioned advantages in going public overall generate a level of boost for the firms operation. Despite the many advantages given when a firm to makes a public offering, there are also many disadvantages related by going public. First looking at the financial aspect, the process of initial public offering can be very costly because of the necessary expenses it entails. Some of the primary cost includes legal, accounting, registration with the Security and Exchange Commission as well as the underwriter fees. Because of the strict standards set by the Security and Exchange Commission, the firm would have to reorganization of its capital and organizational structure to ensure that they adhere to those standards. Another disadvantage and perhaps the most concerned for the creators of the firm is the loss of control over the firm. Restriction on the ability to sell additional shares privately will fall upon the shareholders and creators of the firm.
There are many battles to face when considering going public; however, once the firm meets the expectation of the market and follows the regulations and guidelines of the Security and Exchange Commission, they should reap more benefits by going public. Overall, a firm that is relatively small in the market or a firm that is just considering expansion can grow significantly and stand beside some of the top firms in the world with operations that cross borders of profits and international recognition.
Benefits of Going Public
While it is customary for companies to acquire additional funding through debt financing which is basically the process of borrowing money that has to be repaid with interest at some later date. By going public the company obtains Equity financing which is money rose to be utilized in the growing of the company but does not have to be repaid. With this additional funding, companies can offer better employment packages to employees which will attract more skilled and qualified staff. Moreover, additional projects can be undertaken which may boost the company financially as well as heighten its image in regard to its corporate responsibility depending on the projects undertaken. With shareholders from a broad cross-section, a public company gains a greater allegiance and concern for its well being from shareholders and their affiliates as the success of the company is their success as well as part owners of that company etc.
Concerns of Going Public
With added capital comes added responsibility, these responsibities may arise from the strict criteria set forth by the regulatory bodies and legislature that governs the process of trading publicly. A sense of privacy is loss as public companies are required to make sensitive information available such as balance sheets and income statements to investors and potential investors in the form of financial reports. Moreover, a company is at risk of losing control of the business as shareholders who are the purchasers of public shares have a say in who sits on the board of directors and how the company is managed via their voting rights. A company may also loose its cultural identity as persons and groups of persons from varying ethnicities including other businesses can purchase shares indiscriminately as they become available.
In conclusion, we would like to reiterate the pivotal circumstance in which a company may become desirous of making a public offering. This circumstance is the obtaining of finance for business operations and projects in light of a decline in venture capital, grants and other forms of financial expedience. A firm offering its shares to the public has numerous benefits to advance its self with, however on the other hand, that company must keep in mind the freedom that is given up by doing so and the risk involved.
We would certainly like to see more local companies in particular engaged in public trading in this globalization era. The newest Stock Exchange in the Caribbean namely The Eastern Caribbean Securities Exchange is undoubtedly on par with security exchanges in the more developed societies as far a technological advancement is concerned.
The St.George's University school groups like the "Business Students Association" (BSA) and others can play a significant role by partnering with the Grenada Chamber Of Commerce and other institutions to conduct "going public" seminars. This venture would surely enlighten and encourage local companies and residents alike to get involved this great phenomenon.
