Tip of the Week: Do an IPO if You Can?

The IPO market is beginning to wake up. Several smaller underwriters are beginning to work on new issues for companies in the size range of some reverse mergers and self-filings. Is an IPO preferable to alternatives if available? I am asked this all the time. The answer: typical lawyer am I - it depends. The IPO is often see as the brass ring, the great exit opportunity for investors, and so on. If you can complete an IPO, with an underwriter that actually closes substantially all deals they start, at a fair valuation in a reasonable amount of time and not raise more money than you reasonably need, you should probably do it. We work on IPOs and are happy to do so. But an IPO does take longer than a reverse merger, costs substantially more and includes the risk that after months of preparation the underwriter lowers the offering price at the last minute or even shelves the deal.

Some say an IPO is better because market support for the new public stock develops faster than a reverse merger. This is true. But the group of underwriters completing an IPO do not provide support indefinitely. After they bring initial investors in and then out, it is not at all certain that support will remain. This is why many post-IPO companies face an initial rise in the stock followed by a period of much lower trading price. After a reverse merger or self-filing, a different attitude is needed - the key is developing market support over time. In general, companies that achieve their goals do get the attention and support and have the opportunity to “uplist” to Nasdaq or the NYSE Amex. And WestPark Capital’s WRASP technique (now being utilized by other investment banks) creates a path for a post-reverse merger company to move directly to the NYSE Amex or Nasdaq following a small secondary public offering, again with the same kind of support one sees following an IPO.

For some an IPO really does make sense. But every company contemplating its strategic direction should look at all alternatives and methods to go public and compare the pros and cons of all options as they relate to that company’s unique set of circumstances.

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