What Are the 4 Ways for Going Public and Which One Is Right for Your Company?

Going public is a significant milestone for any company, offering access to capital, increased visibility, and liquidity for shareholders. However, the path to becoming a public company is not a one-size-fits-all process. There are four primary methods for going public: Initial Public Offering (IPO), Special Purpose Acquisition Company (SPAC), Direct Listing, and Reverse Merger. Each approach comes with its own set of advantages, challenges, and strategic implications.

Understanding the nuances of each method can help businesses choose the best route for their unique circumstances. Let's explore these four methods for going public and what companies should consider when selecting the right strategy.

Initial Public Offering (IPO)

An Initial Public Offering (IPO) is the most traditional and well-known method for going public. In an IPO, a company works with investment banks (underwriters) to sell shares of stock to the public for the first time. This process typically involves a significant amount of preparation, including regulatory filings, roadshows, and pricing discussions.

Advantages of an IPO:

1. Capital Raising: An IPO allows companies to raise substantial capital by selling shares to the public, which can be used to fund expansion, pay down debt, or invest in new projects.

2. Brand Visibility: Going public through an IPO can significantly increase a company's profile and credibility, attracting both customers and investors.

3. Liquidity for Investors: IPOs provide liquidity for early investors, founders, and employees, allowing them to sell shares on the open market.

Challenges of an IPO:

1. High Costs: The IPO process is expensive, with companies often spending millions of dollars on legal, accounting, and underwriting fees.

2. Lengthy Process: Preparing for an IPO can take several months to a year, involving extensive due diligence, financial audits, and regulatory approval.

3. Market Volatility: The success of an IPO is dependent on market conditions. Poor timing due to economic downturns or stock market volatility can negatively impact the offering's success.

An IPO is typically best for companies that are well-established, have strong financials, and are looking to raise significant capital while increasing their public profile.

Special Purpose Acquisition Company (SPAC)

A Special Purpose Acquisition Company (SPAC) is a faster, less traditional route to going public. A SPAC is a publicly traded shell company that raises capital through an IPO with the intention of acquiring a private company and taking it public. Once the SPAC identifies a target company, the two merge, and the target company effectively becomes public.

Advantages of a SPAC:

• Speed to Market: A SPAC merger is often faster than a traditional IPO, sometimes taking as little as three to six months to complete.

• Certainty of Terms: In a SPAC transaction, the terms are negotiated upfront, providing more certainty around valuation and capital raised compared to the fluctuating pricing environment of an IPO.

• Access to Expertise: Many SPAC sponsors are seasoned investors or operators who bring industry experience, making the process smoother and offering strategic guidance.

Challenges of a SPAC:

1. Dilution Risk: SPACs often come with the risk of dilution for existing shareholders due to the combination of sponsor shares and warrants issued during the SPAC IPO.

2. Perception: SPACs have become popular, but there’s still a perception that companies going public via SPAC may be less financially stable or mature than those taking the IPO route.

3. Regulatory Scrutiny: SPACs have recently faced increased regulatory attention, which could slow down deals and increase compliance costs.

SPACs are often an attractive option for companies that want to go public quickly or those seeking a more flexible and certain valuation process.

Direct Listing

A Direct Listing allows a company to go public without raising new capital or issuing new shares. Instead, existing shareholders, such as employees and early investors, sell their shares directly on a public exchange. There are no underwriters or new shares issued in a direct listing, making it a streamlined and cost-effective alternative to an IPO.

Advantages of a Direct Listing:

1. Lower Costs: Without the need for underwriters or large fees associated with traditional IPOs, direct listings are generally less expensive.

2. No Dilution: Since no new shares are issued in a direct listing, the ownership stake of existing shareholders is not diluted.

3. Immediate Liquidity: Shareholders can immediately sell their shares on the public market, providing liquidity without lock-up periods often associated with IPOs.

Challenges of a Direct Listing:

1. No Capital Raised: Since direct listings do not involve issuing new shares, companies don’t raise additional capital, which can limit their ability to fund future growth.

2. Volatile Pricing: In a direct listing, the opening share price is determined solely by the market, leading to potential price volatility in the early days of trading.

3. Limited Support: Without underwriters, companies going public via direct listing have less institutional support in managing the listing process and attracting investor interest.

Direct listings are best suited for companies that don’t need to raise new capital but want to provide liquidity for existing shareholders and gain the benefits of being publicly traded.

Reverse Merger

A Reverse Merger involves a private company merging with an already publicly listed company, usually a shell company with no significant operations. By merging with the public entity, the private company gains a public listing without going through the traditional IPO process.

Advantages of a Reverse Merger:

1. Speed and Simplicity: Reverse mergers can be completed faster than IPOs, sometimes within a few months, allowing companies to go public without the lengthy preparation typically required.

2. Cost-Effective: While reverse mergers are not free, they are usually less expensive than the costs associated with an IPO.

3. Access to Capital: Although reverse mergers themselves do not raise capital, companies can follow up the merger with private investment in public equity (PIPE) deals to secure additional funds.

Challenges of a Reverse Merger:

1. Potential for Lower Visibility: Companies that go public via reverse mergers may not receive the same level of attention or credibility as those that go through an IPO, which could impact stock performance.

2. Legacy Liabilities: If the shell company has unresolved legal or financial issues, those liabilities can carry over to the newly merged entity.

3. Regulatory Scrutiny: Reverse mergers have been under greater regulatory scrutiny due to concerns over their use by less transparent or underperforming companies.

A reverse merger can be a viable option for smaller or mid-sized companies seeking a faster, more cost-effective route to public markets but still need to raise capital in a follow-up offering.

Conclusion: Which Path is Right for Your Company?

Choosing the right method to go public depends on a company’s unique circumstances, including its capital needs, time constraints, market conditions, and strategic goals. IPOs are ideal for companies looking to raise significant capital and enhance their visibility. SPACs offer a faster, more flexible alternative with greater certainty around valuations. Direct listings provide a low-cost option for companies that don’t need to raise new capital but want to go public. Finally, reverse mergers offer an expedited and cost-effective path to public markets, especially for smaller companies.

At Orgon Bank, we understand that every company’s journey to the public markets is different. With our expertise in capital markets, we provide strategic advice tailored to your business needs, helping you navigate the complexities of going public and ensuring your company is positioned for long-term success.