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IPO, Reverse Merger and Direct Listings: Three Ways a Private Company Can Go Public

Wednesday, March 10, 2021 03:30 PM | Nick Dey

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IPO, Reverse Merger and Direct Listings: Three Ways a Private Company Can Go Public

Going public can be an important step in any company's growth.

For some companies, it is a chance to raise funds so that can fund future growth.

For others is it a chance for early investors and employees to get a chance to cash in on their investment by selling shares to a new set of investors.

Having publically traded shares opens the door for everyday Joes and Joesephines to invest, own, and be heard by the company - though you’ll probably need a lot more than a share or two for that last part to be applicable.

The IPO, or initial public offiering, is the most well known way for a company to go public, however, IPOs are just one of many ways a company can create a public market for its shares.

How a company chooses to go public is a very important decision because it gives some insight into the company’s goals and reasons for attaining a ticker in the first place.

The OG

The classic way to go public is through an Initial Public Offering. During the IPO process, the company works closely with an investment bank to thoroughly evaluate the value of the company before offering the shares on the market. This process can take well over a year, and be pretty expensive.

While some IPOs have been held to sell shares owned by employees and existing investors, most of the time an IPO involves a company selling new shares to raise money from the public.

In an IPO, the company's bankers line up buyers for the shares at a price that is determined largely by what the company and the bankers think is the highest price that will get all the shares sold. This price is typically set the night before public trading begins. When trading beings on the exchange the next day, those initial purchasers can sell their shares on the stock exchange to the public.

Frequently many large investors and employees are bound by a "lockup" period that restricts them from selling shares for usually around 90 days. This helps stabilize the price of the stock as it limits the amount of shares to the shares in the initial offering, and not the entire number of shares outstanding.

The Ticker-Takers

Another way that companies go public is through a reverse merger. The reverse merger, which is also known as a Reverse Takeover (RTO), is more common with smaller companies that may not be well known.

This process is quicker and cheaper than an IPO, but doesn’t offer the company an opportunity to profit from going public, although now that the company is public, it can hold a secondary offering of shares to the public to raise funds if it wants.

Reverse mergers of small companies should be carefully evaluated as the process if often used in the penny-stock space to change the name and ownership of a company with no actual business as part of various kinds of shady dealings. The Securities and Exchange Commission has issued warnings about penny stock reverse mergers.

The New Hotness

One of the most increasingly popular methods to becoming a public company is through a revers merger with a SPAC. SPACs, or blank-check companies, turn the traditional IPO process on it's ear. A group of investors holds an IPO, selling shares to the public and raising a pool of money, with the intention of finding a private company to invest in.

SPACs  have a set amount of time, usually about two years, to find a partner, or the money gets returned to investors and the SPAC is dissolved. This can lead to some less-than-ideal combinations as SPAC managers only make money if a deal is completed.

Going public through a SPAC offers private companies a fast way to go public, with less disclosure and public scrutiny than the IPO process. This can be a great way for a private company to capitalize on hype around its product or service, but it can come at a cost to investors.

The Go-tos

The final way that companies can go public, market debutant Roblox (RBLX) chose, is through a direct listing. In a direct listing, the previously private shares are registered and listed on an exchange and those shareholders are allowed to sell them beginning on a certain date. In a direct listing, the original investors get to cash out, but the company doesn't raise any money.

The company going public tends to be a larger and more well known company, which is because it can be hard for a smaller, less known company to get enough interest from investors. Doing this lets the company avoid paying big bucks to investment banks, but this only really works if the company doesn't need to raise funds.

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