When people hear the letters IPO, they usually think of
large-scale public offerings of securities, such as Facebook's IPO, where a
company raises several hundred million or even billions of dollars in a public
offering of its stock. However, there are many small, emerging companies that
raise capital using the same mechanism as the large-scale IPO on a much smaller
scale. These types of capital-raising transactions are called micro-IPOs.
In a micro-IPO, an emerging company files the necessary
documents with the SEC and NASDAQ or other stock exchange for a public
offering. While the basic process for conducting a micro-IPO is about the same
as that for a regular IPO, the recently enacted Jumpstart Our Business Startups
Act (JOBS Act) significantly relaxed the IPO process for a new class of
companies categorized as emerging growth companies (EGC). An EGC is a company
that had less than $1 billion in total annual gross revenues during its last
completed fiscal year.
The changes to the traditional IPO process, provided by the
legislation, include a significant reduction to financial reporting
requirements, an allowance for a confidential SEC review of the company's registration
statements, expansion of permissible communications during the securities
offering process and expansion of research-analyst coverage and participation.
"Reduction of financial reporting requirements"
means that the accounting and audit costs for preparing the public offering are
greatly reduced, especially for emerging companies with little to no revenue.
The allowance for a confidential SEC review of registration statements and
expansion of permissible communications allows the IPO-candidate company to
"test the waters" in order to gauge public investor response.
In the event there is poor public investor response, the
company can terminate its offering without having exposed its financial and
other information in public filings to public view by its competitors.
After the IPO, the JOBS Act has also provided for an EGC's financial
reporting requirement s to remain public and has effectively eliminated the
usual requirements under Sarbanes-Oxley regarding internal control. This
reduces the cost and burden of staying public so that the management of an EGC
can stay focused on developing its company's business.
To cite an example, we recently got involved in an emerging
technology company in the combustion control industry. The company was
pre-revenue at the time of the IPO but had developed technologies that address
a very large potential market. Rather than seek traditional private
venture-capital financing, the company's management decided to raise capital
using a micro-IPO.
company subsequently was able to raise over $12 million in the micro-IPO at a
valuation much higher than that offered by private financing options and
without the handcuffing terms typical in venture capital financing. Further,
the company's shares traded well following the micro- IPO, allowing it to
command a significant market cap. The micro-IPO turned out to be a good option
for this company and its shareholders. It might be something to consider for
your company as well.