FAQ
Why should I become a public company?
- Do you require additional Capital?
- Do you have merger and acquisition plans?
- Do you want to sell a private held business?
If you answered YES to proceeding three questions then, "going public" may be the right choice, but you should weigh your options carefully.
What are the benefits of being a public company?
- Your access to capital will increase
- Your company may become more widely known.
- You may obtain financing more easily in the future.
- Controlling shareholders, have a ready market for their shares
- Your company may be able to attract and retain more highly qualified personnel
- The image of your company may be improved.
What are the obligations of being a public company?
- You must continue to keep shareholders informed
- You may be liable if you do not fulfill these new legal obligations.
- You may lose some flexibility in managing your company's affairs.
- Your public offering will take time and money to accomplish.
What are the "primary" USA Federal Laws regarding securities?
There are two primary sets of federal laws
- Securities Act of 1933 (Securities Act)
- The Securities Act generally requires companies to give investors "full disclosure" of all "material facts," the facts investors would find important in making an investment decision. This Act also requires companies to file a registration statement with the SEC that includes information for investors. The SEC does not evaluate the merits of offerings, or determines if the securities offered are "good" investments. The SEC staff reviews registration statements and declares them "effective" if a company satisfies the disclosure rules.
- Securities Exchange Act of 1934 (Exchange Act)
- The Exchange Act requires publicly held companies to disclose information continually about their business operations, financial conditions, and managements. These companies, and in many cases their officers, directors and significant shareholders, must file periodic reports or other disclosure documents with the SEC. In some cases, the company must deliver the information directly to investors.
How Does my Business Register a Public Offering?
If you decide on a registered public offering, the Securities Act requires your company to file a registration statement with the SEC before the company can offer its securities for sale. You cannot actually sell the securities covered by the registration statement until the SEC staff declares it "effective," even though registration statements become public immediately upon filing.
Registration statements have two principal parts:
- Part I is the prospectus, the legal offering or "selling" document. Your company - the "issuer" of the securities - must describe in the prospectus the important facts about its business operations, financial condition, and management. Everyone who buys the new issue, as well as anyone who is made an offer to purchase the securities, must have access to the prospectus.
- Part II contains additional information that the company does not have to deliver to investors. Anyone can see this information by requesting it from one of the SEC's public reference rooms or by looking it up on the SEC Web site.
- The basic registration form that all companies can use to register their securities offerings Form S-1, It should be similar to a brochure, providing readable information. Special forms SB 1 and SB 2 for small businesses are available.
What type of information must be provided?
You should not prepare a registration statement as a fill-in-the-blank form, like a tax return. It should be similar to a brochure, providing readable information. Your company must describe each of the following in the prospectus:
- Its business;
- Its properties;
- Its competition;
- The identity of its officers and directors and their compensation;
- Material transactions between the company and its officers and directors;
- Material legal proceedings involving the company or its officers and directors;
- The plan for distributing the securities; and the intended use of the proceeds of the offering
Registration statements also must include financial statements audited by an independent certified public accountant.
In addition to the information expressly required by SEC regulations your company must also provide any other information that is necessary to make your disclosure complete and not misleading. You also must clearly describe any risks prominently in the prospectus, usually at the beginning.
You also must clearly describe any risks prominently in the prospectus, usually at the beginning. A few examples of these risk factors are:
- Lack of business operating history;
- Adverse economic conditions in a particular industry;
- Lack of a market for the securities offered; and
- Dependence upon key personnel.
If my Company Becomes Public, What Disclosures Must I Regularly Make?
Your company can become "public" in one of two ways - by issuing securities in an offering registered under the Securities Act or by registering the company's outstanding securities under Exchange Act requirements. Both types of registration trigger ongoing reporting obligations for your company. In some cases, the Exchange Act also subjects your company's officers, directors, and significant shareholders to reporting requirements. Let's discuss these requirements individually.
Reporting obligations because of Securities Act registration
Once the staff declares your company's Securities Act registration statement effective, the Exchange Act requires you to file reports with the SEC. The obligation to file reports continues at least through the end of the fiscal year in which your registration statement becomes effective. After that, you are required to continue reporting unless you satisfy the following "thresholds," in which case your filing obligations are suspended:
- Your company has fewer than 300 shareholders of the class of securities offered; or
- Your company has fewer than 500 shareholders of the class of securities offered and less than $10 million in total assets for each of its last three fiscal years.
- If your company is subject to the reporting requirements, it must file information with the SEC about:
- Its operations;
- Its officers, directors, and certain shareholders, including salary, various fringe benefits, and transactions between the company and management;
- The financial condition of the business, including financial statements audited by an independent certified public accountant; and
- Its competitive position and material terms of contracts or lease agreements.
- All of this information becomes publicly available when you file your reports with the SEC. As is true with Securities Act filings, small business issuers may choose touse small business alternative forms and Regulation S-B for registration and reporting under the Exchange Act.
Obligations because of Exchange Act registration
Even if your company has not registered a securities offering, it must file an Exchange Act registration statement if:
- It has more than $10 million total assets and a class of equity securities, like common stock, with 500 or more shareholders; or
- It lists its securities on an exchange or on NASDAQ.
If a class of your company's securities is registered under the Exchange Act, the company, as well as its shareholders and management, are subject to various reporting requirements, explained below.
Ongoing Exchange Act periodic reporting
If your company registers a class of securities under the Exchange Act, it must file the same annual, periodic, and current reports that are required as a result of Securities Act registration, as explained above. This obligation continues for as long as the company exceeds the reporting thresholds previously outlined. If your company's securities are traded on an exchange or on NASDAQ, the company must continue filing these reports as long as the securities trade on those markets, even if your company falls below the thresholds.
Proxy rules
A company with Exchange Act registered securities must comply with the SEC's proxy rules whenever it seeks a shareholder vote on corporate matters. These rules require the company to provide a proxy statement to its shareholders, together with a proxy card when soliciting proxies. Proxy statements discuss management and executive compensation, along with descriptions of the matters up for a vote. If the company is not soliciting proxies but will take a vote on a matter, the company must provide to its shareholders an information statement that is similar to a proxy statement. The proxy rules also require your company to send an annual report to shareholders if there will be an election of directors. These reports contain much of the same information found in the Exchange Act annual reports that a company must file with the SEC, including audited financial statements. The proxy rules also govern when your company must provide shareholder lists to investors and when it must include a shareholder proposal in the proxy statement.
Beneficial ownership reports
If your company has registered a class of its equity securities under the Exchange Act, persons who acquire more than five percent of the outstanding shares of that class must file beneficial owner reports until their holdings drop below five percent. These filings contain background information about the beneficial owners as well as their investment intentions, providing investors and the company with information about accumulations of securities that may potentially change or influence company management and policies.
Tender offers
A public company with Exchange Act registered securities that faces a takeover attempt, or third party tender offer, should be aware that the SEC's tender offer rules will apply to the transaction. The same is true if the company makes a tender offer for its own Exchange Act registered securities. The filings required by these rules provide information to the public about the person making the tender offer. The company that is the subject of the takeover must file with the SEC its responses to the tender offer. The rules also set time limits for the tender offer and provide other protections to shareholders.
Transaction reporting by officers, directors, and ten percent shareholders
Section 16 of the Exchange Act applies to your company's directors and officers, as well as shareholders who own more than 10% of a class of your company's equity securities registered under the Exchange Act. It requires these persons to report their transactions involving the company's equity securities to the SEC. Section 16 also establishes mechanisms for a company to recover "short swing" profits, those profits an insider realizes from a purchase and sale of a company security within a six-month period. In addition, Section 16 prohibits short selling by these persons of any class of the company's securities, whether or not that class is registered under the Exchange Act.
Sarbanes Oxley Act 2002, what is it? (SOX)
An act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the security laws, and for other purposes
SOX what does it cover?
- Public Company Accounting Oversight Board (PCAOB)
- Auditor Independence
- Corporate Responsibility
- Enhanced Financial Disclosures
- Analyst of Conflict of Interest
- Corporate and Criminal Fraud Accountability
- White Collar Crime Penalty Enhancements
- Corporate Tax Returns
- Corporate Fraud and Accountability
Listing Standards
American Stock Exchange Listing Standards
| Standard 1 | Standard 2 | Standard 3 | Standard 4 | |
|---|---|---|---|---|
| Operating History | N/A | 2 years | N/A | N/A |
| Stockholders' Equity | $4 million | $4 million | $4 million | N/A |
| Net Income* | $750,000 | N/A | N/A | N/A |
| Total Market Capitalization | N/A | N/A | $50 million | $75 million OR |
| Total Assets | N/A | N/A | N/A | $75 million AND |
| Total Revenues | N/A | N/A | N/A | $75 million |
| Minimum Price | $3.00 | $3.00 | N/A | N/A |
| Market Value of Public Float | $3 million | $15 million | $15 million | $20 million |
| Distribution Alternatives | 800 public stockholders and 500,000 shares publicly held OR | |||
| 400 public stockholders and 1 million shares publicly held OR | ||||
| 400 public stockholders, 500,000 shares publicly held and average trading volume of 2,000 shares for the last 6 months | ||||
* Net income requirement applies to previous year, or 2 out of the 3 most recent years.
NASDAQ Small Cap
| Operating History | 1 year AND |
| Stockholders' Equity | $5 million OR |
| Net Income* | $750,000 OR |
| Total Market Capitalization ** | $50 million |
| Total Assets | N/A |
| Total Revenue | N/A |
| Minimum Price | $4.00 |
| Market Value of Public Float | $5 million |
| Number of Stockholders | 300 |
| Number of Publicly-held shares | 1.0 million |
* Net income requirement applies to previous years, or 2 out of the 3 most recent year
** If $50 million market capitalization requirement is satisfied for SmallCap, then there are no operating history, stockholders' equity or net income requirements.
NASDAQ National Market Listing Requirements
| Requirements | Standard 1 | Standard 2 | Standard 3 |
|---|---|---|---|
| Stockholder Equity | $ 15,000,000 | $ 30,000,000 | N/A |
| Market Capitalization | N/A | N/A | $ 75,000,000 OR |
| Total Assets | N/A | N/A | $75,000,000 OR |
| Total Revenue | N/A | N/A | $75,000,000 |
| Net Income from Continuing Operations (in latest fiscal year or 2 of the last three fiscal years | $ 1,000,000 | N/A | N/A |
| Public Float (Shares) | 1,100,000 | 1,100,000 | 1,100,000 |
| Operating History | N/A | 2 years | N/A |
| Market Value of Public Float | $ 8,000,000 | $ 18,000,000 | $ 20,000,000 |
| Minimum Bid Price | $ 5 | $ 5 | $ 5 |
| Market Makers | 3 | 3 | 3 |
| Shareholders (round lot holders) | 400 | 400 | 400 |
| Corporate Governance | Yes | Yes | Yes |
Seasoned issuers must meet the market capitalization requirement and the minimum bid requirement for 90 consecutive trading days prior to applying for listing.