Many private companies are unable to locate an underwriter prior to going public. A direct public offering (“Direct Public Offering”) provides a viable solution to this dilema. A Direct Public Offering allows a company to sell its shares directly to investors without the use of an underwriter. With a Direct Public Offering, the company files a registration statement
with the Securities and Exchange Commission (“SEC”) to register a securities offering under the Securities Act of 1933, as amended (the “Securities Act”)
Typically, in going public transaction Form S-1 (”S-1”) registration statements are used. A company can use a Form S-1 registration statement to register securities on its own behalf in an initial public offering, register securities on behalf of its selling security holders in a secondary offering or register securities on its own behalf as well as for selling security holders.
]Using a Direct Public Offering to Go Public
All issuers qualify to file a registration statement on Form S-1 and it is the most common registration statement form used in going public transactions. Filing a Form S-1 registration statment in connection with a going public transaction eliminates many of the risks and expenses associated with reverse mergers including among other things, undisclosed liabilities, sketchy corporate records, DTC Chills, Global Locks and SEC trading suspensions.
SEC Review of Form S-1 in Direct Public Offerings & Going Public Transactions
For public companies and private companies going public, an SEC review of the Form S-1 registration statement is common. Upon review, the SEC may render comments which the company must address by filing amendments to the Form S-1 registration statement. When all of the SEC comments have been answered to the satisfaction of the SEC, it will declare the registration statement on Form S-1 effective.
Additional Steps After an Effective Form S-1 in Direct Public Offerings
Filing an S-1 registration statement under any of the above scenarios will not complete the going public transaction. A registration statement alone does not cause an issuer’s securities to become publicly traded and it will not result in the assignment of a ticker symbol. The registration statement will cause the company to become subject to the SEC’s reporting requirements. After satisfying the SEC’s requirements, the issuer must comply with the requirements of the Financial Industry Regulatory Authority (“FINRA”) to obtain its ticker symbol.
FINRA Shareholder Requirements
Generally, FINRA requires that the issuer have at least 25 shareholders who hold shares registered on Form S-1 or with respect to Pink Sheet listed issuers, shares that have been held by non-affiliate investors for twelve months. The majority of the 25 holders should have paid cash consideration for their shares.
Float Requirements in Going Public Transactions
In order to obtain a ticker symbol, a company must also meet FINRA’s public float requirements even where it files a Form S-1 registration statement with the SEC. The company’s outstanding shares held by its non-affiliates in the aggregate should represent at least 10% of the issuer’s outstanding securities. These shares become what is often referred to as the “Float.” The Float must also be somewhat evenly distributed without significant concentration in one or a few shareholders. These shares should be unrestricted securities either because the shares were registered with the SEC or exempt from registration.
Sponsoring Market Makers & Form 211
FINRA requires companies to locate a sponsoring market maker to submit a Form 211 (“211”), on its behalf even where the issuer has filed a Form S-1 registration statement with the SEC. Upon the sponsoring market maker filing a 211, FINRA will conduct a review and provide comments to the sponsoring market maker which the company and its securities attorney must address. Upon receipt of confirmation that all comments have been answered satisfactorily, a ticker symbol is assigned and the company’s securities are publicly traded.
By undertaking a Direct Public Offering using a Form S-1 followed by a Form 211, the issuer avoids many of the expenses and risks associated with reverse merger transactions including incomplete and sloppy records, pending lawsuits and other liabilities including securities violations. For a company seeking public company status a direct public offering using a registration statement filing with the SEC offers a cost and time effective solution.
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