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The Cost of Being a Public Company
The Cost of Going Public
The average cost for a traditional U.S. Securities and Exchange registration and listing on the Over-the-Counter Bulletin
Board (OTCBB) has risen to about $1,500,000 in 2003. In 2005, the cost has risen to $3,133,000 due to massive increases in
audit and compliance costs. If your company wants to list on Nasdaq, the cost will be an additional $500,000. Registration
and listing costs have more than doubled in the past two years thanks to stock scandals that have significantly increased
GAAP audit costs and increased regulatory compliance requirements that resulted from the Sarbanes-Oxley Act.
The Reasons that the Costs of Being Public Have Increased
Section 404 of the Sarbanes-Oxley Act addresses accounting control issues for U.S. Domestic public companies. Section 404
requires increased corporate responsibility and accountability. This means increased financial disclosure that results in
increased audit and liability-insurance costs.
Being Public in 2003
The legal, accounting and other costs of being public rose to an estimated average of $2.86 million for OTCBB firms in 2003.
Major public companies paid, on average, $7.41 million to trade on Nasdaq, AMEX and the NYSE, according to a survey by Foley
& Lardner LLP.
The Foley & Lardner 2003 survey breaks down the 2003 costs as follows:
OTCBB Firms, which they call small public companies
Director and Officer Insurance $850,000
Accounting $824,000
Legal $468,000
Board Compensation $313,000
Lost Productivity $160,000
Other Sabanes-Oxley costs $100,000
Governance Setup Costs $147,000
TOTAL $2,862,000
Nasdaq, NYSE, AMEX firms which they call large public companies
Director and Officer Insurance $2,200,000
Accounting $1,200,000
Legal $ 841,000
Board Compensation $ 247,000
Lost Productivity $2,500,000
Other Sabanes-Oxley costs $ 246,000
Governance Setup Costs $174,000
TOTAL $7,404,000
For a detailed update on these going public costs, see William Cate's article "Sabanes and the Cost of Going Public in America."
It can be found at GoArticles.com and elsewhere on the Net.
Investor Relations Costs
In addition to increased compliance costs, public companies are faced with the ongoing obligation to find buyers for their
shares. An OTCBB company with an effective float of one million shares and an average share price of $6.00/share should budget
$1.2 million to maintain that share price for the year. A Nasdaq or NYSE company with an effective float of 2 million shares
and an average price of $15/share should budget about $4.0 to maintain their share price.
Three Solutions to Reducing Costs of Being a Public Company
1. Grant Thornton International, an accounting/business adviser to midsize firms, reports a steady rise in the number of companies
going private after passage of Sarbanes-Oxley. Most are OTCBB companies, with management buyouts as the preferred means of
taking these firms private.
2. Mergers of existing public companies have been the standard alternative to taking the company private.
3. Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] advises both U.S. public and private companies to
move offshore and structure themselves as foreign corporations. As a Non-U.S. Company, their registration and compliance costs
will drop below $500,000. If the client companies follow the Beowulf Investments Investor Relations program, their costs should
be below $100,000/year.
The days for an American private company to go public as a status symbol
are over. The SEC compliance costs will either force U.S. Domestic Companies to relocate offshore or preclude them from taking
advantage of the money raising benefits of being a public company. For U.S. companies, it comes down to a choice between reduced
access to capital or reduced jobs in the United States. I suspect that most CFOs will favor moving the jobs offshore to going
bankrupt.
Going Public costs continue to rise by at least 20% per year. The longer you wait to take your company public, the more it
will cost.
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