The Cost of an IPO

Multicom Publishing Inc., in Seattle, needed cash to continue developing its line of CD-ROMs. The company, with revenues of $3.9 million in fiscal year 1995, raised $7.2 million last June in an initial public offering. But Multicom netted less than $6 million. A dollar-by-dollar look at the cost of one company's IPO

The Securities and Exchange Commission extracts 1/ 29 of 1% of the offering value of shares sold to the public, which was $3,490 for Multicom. The Nasdaq SmallCap Market application fee is $10,000. Listing fees are based on the number of shares outstanding. Companies must also pay an annual fee--up to $4,000 a year on Nasdaq SmallCap--to maintain the listing.

The National Association of Securities Dealers' filing fees are based on the value of the offering, but with a cap of $30,500. Multicom paid $1,600.

Multicom's lead underwriter, Laidlaw Equities Inc., in New York City, priced the securities at $6.50 a share and purchased 345,000 of the 1.1 million total shares from Multicom. The underwriting fee is the difference between the offering price to the public and the price Multicom receives. Laidlaw paid Multicom $5.98 a share and then sold those shares at the offering price of $6.50, earning a total of $179,400. Laidlaw put together a syndicate of 25 other investment-banking firms, which bought the remaining 755,000 shares, also for $5.98 a share, which brought them in a total of $392,600.

Underwriting fees are negotiable, usually ranging from 6% to 8% of the public offering price. Had the offering been canceled at the 11th hour, Multicom had agreed to pay Laidlaw a termination fee of $150,000 plus out-of-pocket expenses.

Price Waterhouse LLP performed a nine-month audit. Multicom's accounting costs were just below Nasdaq's median of $160,000 for public offerings. Those costs don't vary much with the size of the offering.

While it was a private company, Multicom chose not to take out this insurance. But when it went public, its directors and officers could no longer remain uninsured, because the liability risk rises sharply with the broader base of public shareholders. Following standard practice, Multicom used a broker that solicited bids.

Laidlaw received an expense allowance of about 2% of the offering price of the shares. It would get that money regardless of the actual expenses incurred. Such expense allowances are negotiable and are included when an offering is small and relatively risky.

Multicom entrusted its shareholder list to American Stock Transfer and Trust Co., one of many firms that perform the physical transfer of stock certificates and maintain a list of share owners, which of course continually changes. That list enables the company to mail proxy and other materials to its shareholders.

Multicom had to draft various documents, including the offering prospectus, to inform potential investors about the company and the risks of buying its stock. A team of securities lawyers combed the documents "line by line and period by period," says chief financial officer Ellen Boyer. Even though Multicom drew on its in-house legal counsel as well as on outside lawyers, its legal expenses were about average, according to Nasdaq. Multicom and Laidlaw each employed its own set of lawyers. Representing Multicom was the Palo Alto, Calif., office of Gray Cary Ware & Freidenrich, whose fees Multicom paid after completion of the offering. The lawyers and accountants get paid even if the offering gets canceled.

A disadvantage of going public on the Nasdaq SmallCap Market, as Multicom discovered, is that state regulators do not automatically accept the new security for sale by brokers in their own states as they do with companies listed on the Nasdaq National Market, the New York Stock Exchange, and the American Stock Exchange. Multicom received regulatory approval to sell its securities in 30 states. Approval by 11 of those states came automatically when Multicom listed itself on the Boston Stock Exchange. Other approvals came as a result of state-by-state applications. The Blue Sky fees covered registration expenses, which vary by state, as well as additional legal fees.

In addition to the prospectus, the company filed five bound volumes of exhibits with the SEC, which had to be printed. Representatives from the company, counsel, and the underwriters camped out at the financial printer, Bowne & Co., in San Francisco, until the final proofs were approved. Multicom's printing expenses came in below the $100,000 median figure calculated by Nasdaq. With a small offering, relatively fewer copies of the prospectus need to be printed.

Multicom had to pay for the travel-and-entertainment expenses connected with its road show. It paid for temporary workers to help process all the paperwork generated in preparation for the IPO. It paid copying fees to duplicate a lot of that paperwork, which in turn required more temporary help, and so on. Source: Estimates based on prospectus, SEC registration statement, and interviews with Multicom.

Stephen D. Solomon is an associate professor of journalism and mass communication at New York University.


MULTICOM PUBLISHING, Ellen Boyer, 1100 Olive Way, 12th Floor, Seattle, WA 98101; 206-622-5530 80

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