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LEGAL ISSUES

Weighing the Benefits of Hitting the IPO Road

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Initial Considerations

For quite some time, the strong bull market has distracted the public's eye. One symptom of this is that talk of the next hot IPO has migrated from Wall Street to Main Street. Indeed, one can routinely overhear conversations in restaurants, on talk radio, or even in gyms centering on the mind-boggling run-up of the latest public offering.

While some may view IPOs as Wall Street's version of the craps table, this view is not entirely deserved. Yes, IPOs offer a speculative element for high-risk investors. This is particularly true when companies with limited operating histories and successive quarters of losses running into the millions go public. However, IPOs also serve an important business function. For a company going public, the infusion of capital offers management an opportunity to accelerate its growth by hiring more people, conducting more research, and delivering more products and services.

Still, an IPO is not without pitfalls. So, a company should be aware of the benefits and trade-offs of raising capital through a Securities and Exchange Commission-registered public offering. After all, selling the company, borrowing from financial institutions or selling securities in exempt transactions may present better alternatives.

Benefits

  • A publicly traded company may tap a broader universe of investors as well as a larger pool of investment capital.
  • A publicly traded company may receive more public attention.
  • A publicly traded company may raise more capital through additional stock offerings if sufficient investor interest exists.
  • A publicly traded company may be able to attract and retain more highly qualified personnel if it can offer stock options, bonuses, or other incentives with a known market value, especially in a tight labor market.
  • A public market for a company's shares allows existing shareholders to more easily sell their interests at retirement, for diversification, or for some other reason.

Trade-Offs

  • A publicly traded company must continue to keep shareholders informed about the company's business operations, financial condition, and management, incurring additional costs and new legal obligations.
  • A publicly traded company may be liable if it does not fulfill these new legal obligations.
  • A publicly traded company may lose some flexibility in managing its corporate affairs since certain actions require shareholder approval.
  • A public offering takes time and money to accomplish.

Final Thoughts

The first day of trading carries a certain air of excitement. How receptive will the stock market be to the company's shares? As the company's management team and employees await the public's judgment, they should be reminded that a successful IPO represents both the end of a short expedition and the beginning of a longer journey.

While the company enjoys a public valuation, it must now operate in a new world under increased regulation and public scrutiny. Indeed, the added duties of earnings releases and shareholder communication may be opportunities to strengthen investor and analyst relations, as well as potential invitations to grueling shareholder litigation.

Copyright 1999 Findlaw Inc.




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