Not all companies view an IPO as the light at the end of the tunnel. In fact, for many, the mere idea of increased and ongoing expenses, loss of control and privacy, increased pressure to perform, the time and commitment to investor relations, complied with potential threats of hostile take overs and litigation risks are enough to give cause for many businesses to look for other options. However, like the IPO route, they aren't without their inherent risks. Below is a list of potential IPO alternatives, outlining both their pros and cons.
Also known as a 144A Offering, an exempt offering allows some companies to offer and sell their securities, without having to register the securities with the SEC, to Qualified Institutional Buyers (QIBs- certain institutions that manage at least $100M in investments or $10M if broker-dealers). However, they are still required to submit what its knows as a "Form D" post-transaction with the SEC that includes information about the companies promoters, executives and directors, some detail about the about the offering itself, but it does not require reporting of much information about the business itself.
- The terms are more flexible than with an IPO because there are no detailed disclosure requirements.
- The speed at which these transactions can occur is much faster than an IPO because their is no SEC review process.
- Funds can be raised immediately without requiring reporting first.
- The offering is limited to specific qualified institutions which can limit the potential size of the offering all together.
- There are increased restrictions of the resale of the securities causing the price to be lower than with an IPO.
- There are increased restrictions on advertising and publicity surrounding the transaction.
Reverse Merger/Special Purpose Acquisition Companies (SPACs)
Also known as a "Reverse Takeover" or "Reverse IPO," this is when a private company and public company merge. During the reverse merger investors from a private company take over a majority of the shares of a public company, which is then merged with the purchasing entity.
- Allows private companies to go public without raising capital, which simplifies the process.
- Takes less time to complete, saving a lot of time, energy, and money.
- This process is less dependent on market conditions than an IPO.
- No capital is raised during a reverse merger.
- The act of investors selling off shares of the original public company can negatively impact the stock price.
- Often smaller companies have inexperienced management teams, which can result in increased costs in terms of both time and money, resulting in an under-performing company.
A private sale is exactly what it sounds like. It is when the sale of equity occurs, without an exchange.
- A private sale is typically less expensive and takes less time than an IPO because there is no SEC review.
- Underwriters are not required during the sale, though still valuable.
- Percentage of initial sale equity is typically larger than an IPO.
- Choosing to sell the company privately can be less profitable than an IPO.
- Potential to lose future tax benefits.
- Typically there is a smaller pool of potential buyers, leaving fewer options.
Regardless if a company chooses to "go-public" or takes an alternative route it is critical that they do their due diligence before making their final decision. Also, when in discussion with potential investors, acquirers, underwriters, bankers, or lawyers it is critical that the business itself remains in control of their corporate information. Using a Secure Virtual Data Room during this process will give the company its best chance at a successful and smooth transaction.