The Portable MBA in Finance and Accounting, 3rd Edition

(Greg DeLong) #1
Going Public 461

offering (IPO); or merging with a strategic partner (such as Big Deal Corpora-
tion), which might pay a high price to acquire Dough-Ware and add it to its sta-
ble of software products offered by its existing sales force.
Dough and Manager precede the board meeting by visiting with corpo-
rate attorney Stanley Sharp, who explains the difference between selling stock
privately and selling stock in an IPO.
Both the United States government and all of the states substantively
regulate the offer and sale of securities within their borders. The offer and
sale of securities federally is regulated by the Securities and Exchange Com-
mission (SEC) under authority granted by the Securities Act of 1933. Each
state also has its own similar statute, administered by various state agencies;
these state statutes collectively are referred to as “Blue Sky Laws.” It is neces-
sary to satisfy both federal and state law in order for Dough.com Inc. to sell
shares of stock.
Whether shares of stock are sold privately or publicly, all of these laws at
a minimum require full disclosure of material information. This means that in
both private and public transactions the company typically must prepare an of-
fering document which explains its business, finances, and the risks of invest-
ment. In a private offering, this booklet is often called a private placement
memorandum (PPM); in an offering to the public, this booklet is called a
“prospectus.”
The big difference, Attorney Sharp continues, between public and pri-
vate sale of securities has to do with whether the transaction by which those
securities are sold is “registered” with government authorities. Registration is
the process by which the offering document is filed with and reviewed by
such authorities. In a private transaction or “private placement,” there is lit-
tle or no involvement of either the federal or state governments. A private
placement generally is effected to a limited number of investors who, because
of their small number or because of their financial resources or sophistication
in making investments, do not trigger the registration requirements of fed-
eral or state law. Attorney Sharp explains that in a $40 million private place-
ment, it is likely that the securities will be sold to sophisticated venture
capital investors who qualify as “accredited investors” under Regulation D of
the General Rules and Regulations of the SEC, which by its terms exempts
such sale from the federal registration requirement. Further, in many such
transactions compliance with the federal law automatically will constitute
compliance with state laws.
An IPO involves selling securities in smaller minimum investments, to a
greater number of people who need not meet any standard of sophistication or
financial resources. These people must receive a prospectus which has been re-
viewed by the SEC, and in order to obtain clearance to finally utilize that
prospectus in the sale of their securities, the company will have to undergo a
“going public” process that is liable to take at least four months of manage-
ment’s time and attention.

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