As an entrepreneur, one of the most important decisions you'll make is the decision to recoup some of the substantial investment that you've made in your business venture. And also to help your early investors, your early shareholders realize gains on the investments that they've made in your business. So in this lesson, we're going to be talking about taking your business public. That's one strategy for recouping the investment in your business. Now, the objectives for this lesson are one, to talk about the pros and cons of going public, two, give an overview of the initial public offering or IPO process. And finally we'll say a few words about the registration statement and that's a very important legal document that must be filed with securities regulators during the IPO process. Now, as a caveat to this lesson, let me point out that we're using a US law as the backdrop for the for this lesson and for the issues that we are exploring in this lesson. So if you are in a country outside of the United States, you want to be sure to make sure you understand the securities laws and the securities regulations in the country that you're doing business. While many of the principles that we're talking about here with respect to US law are broadly applicable. There are nuances in every country and you want to make sure that you're getting the specific laws and regulations in your country before proceeding. First, the pros of going public now, as you can imagine, taking your business public, has a ton of upside, first, it allows you to extract extreme value and sometimes more value than you would from private financing. It allows you to recoup the investments that you've made in the company, and sometimes at much higher valuations than you would, for example, from getting financing from family or friends or from angel investors, or, from venture capitalists. That going public also allows your early investors to realize a return on their investments, and sometimes at many times the value of their initial investment. So that's a huge upside for your, your early investors. And it's a huge incentive for early investors to get in if they think that your exit strategy is to go public. And finally, by going public, it exposes your business to public funding. So while you may have a limited number of early investors by going public, you open that up to broad financial markets and investors from all over the world really capitalizing your company in a major way. So that's some of the pros of taking your company public. Going public is not without its drawbacks. First, it's a very expensive process. In order to go through the initial public offering process, you must go through a very complex web of laws and regulations and financial disclosure requirements. And this requires very expensive lawyers, very expensive accountants and financial planners, auditors in order to ensure that your books and your company's business practices are all buttoned up in order to get through the IPO process successfully. So there's a ton of expense that comes along with an IPO. Secondly, as a public company, you have a heightened legal obligations. For example, when you're a private company or just a startup, you do have obligations to your early investors and to your initial shareholders. But once you become a public company, you now have these heightened obligations to all of your shareholders. The obligations that fiduciary obligations, obligations of the duty of care and the duty of loyalty, the duty to make good decisions that are in the best interest of the shareholders. And now, rather than having a few early investors, you have the wide swath of shareholders all over the world, that you must make business decisions that are in their best interests. And those heightened legal requirements are something that you must adhere to. And securities regulators, for example, the SEC, Securities Exchange Commission here in the US, is charged with ensuring that public companies are behaving and making decisions that are in the best interests of their shareholders. So that's another drawback of going public. Next. Another drawback of going public is disclosure requirements. And this process is unique to public companies, whereby you must publicly report on the financial health of your company and do so at regular intervals. And so here in the US, the Security Exchange Commission requires that companies disclose publicly how the company is doing and the amount of internal work that it takes to gather the information that's needed to make these disclosure requirements is another tax, another expense. Another burden that you must go through as a public company, that you don't necessarily have to go through when you're a private company. And then finally, another drawback of going public is the restriction on the sale of stock. And there are two restrictions that I want to point out in the context of this lesson. First, when you have an IPO. So if your company is successful and get through the IPO process, early investors. So your VCs and your angel investors, there's a period of time, right after the IO, that those investors are prohibited from selling their stock. And we call this the lockup period. And the idea there is to give the public a chance to understand the IPO offering. To understand the value of the stock before the early insiders are able to sell off their shares and their interest in the company. So that's one restriction on the sale of stock. The other is really tied to insider trading laws. And the idea here is that if you are an insider to the company and employee, an officer or a director and you have material information that's not known to the public that could impact the value of the shares in that company. Then you can't sell during the time when you have that material information that's not publicly known. That's another restriction on the, on the sale of stock. So, while going public allows you to raise capital and to liquidate your interest in the company. Those restrictions are things that you want to keep in mind if you're weighing the decision to go public or not. Now, let's talk about the international Jesus, [COUGH] now let's talk about the initial public offering process. Now, this process is a long and drawn out process, and it's the process here in the US that is fairly complex, so we'll step through the highlights of that process. First as a business who was thinking about going public. The first thing you want to do is draft preliminary preliminary registration statement and a prospectus. This preliminary statement essentially goes through the financial health of your company. How the company has been doing what the value of the shares in the company are and essentially what you will pitch to the public for why they should invest in your company. Now, we call this a preliminary registration statement because it has not yet been reviewed and blessed by the regulators, but this is the first step gathering that information. Now, secondly, you filed that preliminary registration statement in perspective with the securities regulator, in the US it's the SEC. The SEC will go through with the fine tooth comb. Every aspect of that registration statement and perspectives and make comments. They'll push back on statements that are being made. They will ask for additional supporting documentation for statements that are being made and additional comments. Yeah, I send that back to you. Now what you'll do then is take those comments and amend your registration statement and perspectives. And we call this the pre-effective amendments based on the regulators comments and their pre effective because still the regulator has not finally blessed your registration statement or you're offering to the public. But once you have your amendments, your pre-effective amendments to the registration statement, then you can go on your road show. And your roadshow was like your business pitch on steroids, in your road show, you set up a series of meetings with potential investors in your company and you go through everything that's in the registration statement. You talk about where your company is and it's kind of business cycle, what the company's work. You go through your financials. You go through what you think the value of shares and the company is and should be. And you get feedback from all of these potential investors, and you incorporate that feedback into your registration statement of perspectives and submit that to the securities regulator, and that ends up in what we call the final registration statement and prospectus that's attached to it. And that final registration statement is what kicks off the IPO process. The process by which you make shares available to the public. Let's talk a bit about the registration statement. And this is a very important legal document. And as we said, it is the document that drives the IPO process. Now, in that document, you have to be very detailed about who your company is, what you do for a business, how successful your business is the financial health of your business, and all of these things in excruciating detail. And this is why it's important to do your due diligence. So as you're thinking about an initial public offering, you want to make sure that your legal counsel is doing a very thorough job in the due diligence period, meaning they should interview the founders, the board of directors, any vendors that the company has done business with the accountants. Anyone that's touching the contours of the business should be interviewed during this due diligence period. And this is extremely important because as a company, when you put forth this registration statement, you have an obligation to make sure that you can back up and you can support every statement that you're making in that registration statement. In fact, there's liability for the company if there's any misstatements or misrepresentations in the registration statement. So during the due diligence period, you want to make sure you're uncovering every bit of evidence or supporting documentation to back up every statement that you're making in the registration statement. Now, in terms of liability for misstatements or misrepresentations in the registration statement, in the US there's absolute liability for the company. So if there's a statement in your registration statement that you can't back up that the regulators feel is inaccurate or misleading, there's absolute liability for the company. The company would be civilly liable, meaning they must pay a five but also everyone who participates in the IPO process. So the founders and the board of directors and the officers, they also could potentially be liable for those misstatements. And in the US there is this caveat called the due diligence defense that officers and directors could potentially use if they're being held liable for misstatements. And essentially the due diligence defense says, hey look we did the diligence. We were very thorough in that process. We interviewed people, we had supporting documents we believed as an officer or director that the statement we made was in fact true based on the documentation and the evidence that we uncovered during the diligence period. It's still a very tough defense to win on, but it is in some cases available to directors and officers here in the US. To avoid any of this, what you want to do is make sure that the council that you're hiring to go through the IPO process is doing the most thorough job possible to ensure that every single statement. For example, if you say, my company is the leading company in X industry. You want to make sure you have documentation to back that up and you want to make sure that your council is doing everything they can to find the documentation and supporting evidence that's needed. So in summary going public allows your company to get access to the broader financial markets. It allows you to to raise capital and accelerated, right? But it also requires heightened legal obligations and it's an expensive process. So before your company decides to pursue an IPO, you should seek professional legal advice to first determine if and when your business may be a viable candidate for an IPO. And if the answer to that is yes, you also want to have professional legal counsel working with you throughout the IPO process.
