Going Public: DIY IPO's (everything you need to know about accessing the markets).

For the small business owner unfamiliar with securities regulations, financial markets, and obscure investment laws, accessing capital through any kind of broker dealer or financial exchange is a daunting task. This is no accident. The rules and regulations on how to gain access to capital are purposely complex, difficult to understand, and needlessly arcane. Financial intermediaries have a vested interest in making sure YOU don't understand how to use financial markets to get the money your business needs (without paying them a fat fee, first). This article will correct that, and give you the information you need to make intelligent decisions about getting capital through markets, and guide you through the financial labyrinth. There are many different ways to access financial markets. Some are easier than others, but none, unfortunately, are either easy or simple. Before diving into the ugly mess of rules governing how businesses raise money in public markets, be aware that at a bare minimum your company must have the following characteristics to even consider pursuing public money. These characteristics are: 1. If you are a start-up, you must have an excellent business plan and a decent number of backers; if you are an existing business you must have positive cash flow and be generating regular and stable earnings; 2 at least $10,000-$15,000 for fees and costs; 3. A great deal of patience, and plenty of time to fill out forms and create complicated kinds of documents and paperwork. This is the MINIMUM; in reality raising money from the public is so difficult that very few businesses qualify. But don't let this deter you if you are persistent, determined, and have a business that is successful, you CAN use the information given here to get capital. To begin at the beginning, you must start with Section 5 of the Securities Act of 1933 (also called the 33 Act). This is the federal law (along with the Securities Exchange Act of 1934) that regulates all sales of stocks and bonds to the public. There are basically three exemptions to filing with the SEC (by the way, filing with the SEC is a major pain in the butt expensive, time-consuming, and requiring that you divulge a LOT of complex information and meet difficult standards in order to comply with their rules, which is why the rest of this article is concerned with ways to AVOID filing with the SEC): Rule 4(2) - Private Placements; Rule 503 of Regulation D; and 3(a)(11) Intrastate Offerings. Each of these will be discussed in turn. The first major exemption is for what are called 'private placements', in effect private sales of securities. With private placements the issuer cannot advertise, the buyers must be 'sophisticated' (also known as accredited) investors, and there are restrictions on the number of investors, the resale of the securities, and the amount of securities to be sold. For all intents and purposes, private placements are generally arranged by investment banks for their corporate clients. The securities to be issued under a private placement exemption must be less than $5 million in value, cannot be advertised publicly, must be sold to 30 or fewer investors, and 'accredited' investors are individuals with a net worth exceeding US$1 million, and earnings over $200,000 per year. The private placements exemption flows into Rule 503 of Regulation D, which is being radically revamped according to changes demanded by the JOBS Act (the Jumpstart Our Business Start-ups Act) passed in April last year ('12). In essence, the JOBS Act legalizes crowd funding, and eliminates the need for start-ups to file with the SEC in order to sell securities to the public (if they comply with

certain basic rules). This is an enormous change, and as one might expect of insiders, the SEC and the financial markets are less than thrilled with the changes. The SEC has been dragging its feet for over a year, but the demand for implementing these rules is strong enough that finally it will become effective as of mid-September, 2013. Full legalization of crowd funding (i.e. allowing advertising directly to the public) is expected sometime in spring, 2014. More on all this in a minute. The third exemption is the intrastate offering exemption. This rule allows companies to offer securities without filing with the SEC if the issue is offered and sold ONLY to residents of the state where the business is located. The rules on this are very strict; the company must be resident in the state where the issue is offered, must do its principal business there, and the securities must come to rest in the hands of residents in that state. Since many people have attempted over the years to dance around SEC filing, the interpretation of these rules is such that selling even a single security to a non-resident is sufficient to poisonthe entire offering, that is, render the exemption null and void. Those wishing to take advantage of the intrastate offering should therefore be very cautious about how they apply it. Ideally, if your company is resident and does business in one of the large states California, Illinois, New York, Texas, or Florida there's a chance that you can use this exemption. There's plenty of money in the large states for local businesses, and if you're acting in good faith, pay for a decent local securities attorney, and are careful, you can probably sell your company's securities to local investors. Since you can advertise the sale of your stock (or bonds) directly to the public in your state, it may be worth your while to consult an attorney who specializes in this sort of issue, and possibly pursue it. But be careful. The SEC monitors such activity closely, and you can get in real trouble really fast if you don't play by the rules. To return to private placements and Regulation D, there are several alternatives for small businesses wishing to raise capital with an IPO or a DPO (Initial Public Offering and Direct Public Offering, respectively). IPO's are conducted on actual financial exchanges, whereas DPO's are basically a variety of crowd funding. It should be noted that most entrepreneurs consider public stock markets incredibly hostile, according to Marc Andreessen, co-founder of Netscape. In an interview he gave on the CNBC show Closing Bell, this general partner of VC firm Andreessen Horowitz, said the new running theory among new entrepreneurs is never take your company public, or don't do it as long as you possibly can. After the dot-com bubble burst in 2000, lots of new regulations were heaped on public companies. These new rules make running a public company much more cumbersome and expensive. The cheap money that used to lure entrepreneurs into going public is now excessively pricey. Corporate governance standards are tricky and treacherous. As Andreessen notes, So there have been a series of regulatory reforms, a series of corporate governance movements, and the result has been a huge disincentive to go public, and of course the problem with that is if new companies don't go public then you get exactly what we are seeing, which is the number of public companies falling.. Indeed, there are now about HALF the number of public companies as there were a mere 15 years ago! Restraints are choking the stock markets. For those who depend on public markets for funding, the future looks difficult. Charles Crumpley, editor of the Los Angeles Business Journal, points out that there is virtually no new growth and lots of destruction.

Bearing this in mind, it is possible for a small business or start-up to access financial markets through an IPO. Leading the pack was the London Stock Exchange, which in 1995 launched the Alternative Investment Market, (AIM). Over 3000 companies are now listed there, and the rules for listing on the exchange are much more relaxed than that for the LSE proper. In Germany, the Neuer Markt was established so start-ups could list on an exchange, though it has been less successful than AIM, and its future is in question. In the US, the California Stock Exchange hopes to open in the summer of this year (2013), with an emphasis on helping start-ups and small businesses access capital But in general, in the US a small company seeking an IPO must deal with the Over-The-Counter (or OTC) markets. There are two main (and closely related) OTC markets; the OTC Bulletin Board run by FINRA (the Financial Industry Regulatory Authority, a sister organization of the SEC) [see www.finra.org ], and the NASDAQ OTC Bulletin Board[ www.OTCBB.com ]. These bulletin boards are electronic quotation services; they act as a kind of financial exchange, with varying levels of difficulty to list, and different standards for the companies applying to be listed. The NASDAQ (National Association of Securities Dealers Automated Quotes) OTC bulletin boards have three different levels. The easiest to gain access to is called the OTC Pink Sheets. This is a centralized quotation service. Companies listed on the pink sheet exchange do not report to the SEC or other regulators. There are no minimum sales, profits, or assets required of companies in order to be traded on the NASDAQ OTC BB. The pink sheets (www.pinksheets.com) list the riskiest companies, which are often called 'penny stocks' because shares often trade for mere pennies. The pink sheets are not actually an exchange merely a listing service. The pink sheets are actually a quote medium for brokers; consequently its subscribing members are the ones who decide who gets listed. The pink sheets are NOT a listing service. For those wishing to get listed it is necessary to find a market makeror broker who stands ready to buy and sell the stock. A list of market makers can be downloaded by clicking on this link. The next level up is called simply the OTC Market. The securities traded on this exchange are issued by companies who can't or don't want to meet the standards of listing on the NASDAQ exchange. It's also called the OTC QB. Smaller or developing companies that report to a US regulator are eligible to be listed on the OTC QB. Companies may include so-called shells (that is, companies that are legal entities but do no actual business) and penny stocks, as long as they are current in their disclosure statements and filings with the SEC or other regulators. There are currently over 3000 companies listed on OTC QB, 2300 of them are SEC reporting companies, 650 are banks and thrift's, 300 are shells, and 150 foreign companies. The highest level is called OTC DX, and this is the OTC bulletin board proper. In OTC BB market maker must act as a sponsor for security to be listed here. Companies on the OTC have to make full disclosure with the SEC, meet higher financial standards, and include such securities as warrants, American depository receipts, direct participation programs, national, regional, and foreign equity issues. There are 350 companies, representing $1.5 trillion in market capitalization, and with a $1.8 billion average trading volume. A very similar service is offered via the FINRA OTCBB. Under Rule 15 c 2 11, the SEC allows nonreporting public company securities to be quoted on the FINRA OTCBB by filing a simple disclosure

form. To get quoted on the FINRA service company files regulatory offering with the SEC, like the S-1 registration statement, which requires a company to file a report for a year. A company may also file Form 10 or Form 10-12G, and thus becomes a reporting company under the rules of Section 12 g of the Securities Exchange Act of 1934. Further, to be eligible for the quotation of their securities, a company must find a market maker that will file Form 211 with FINRA. Companies must have enough stock in its public floatto allow Rule 15 c-2-11. Form 211 requires that the company be fully reporting with the US SEC, have a minimum of 40 stockholders holding a minimum of 100 shares each, must have a market maker submit Form 211 and agree to act as a market maker for the company's securities. If you have a shareholder baseof people who have acquired your stock privately, you're eligible under the Securities Exchange Act of 1934 to list on NASDAQ's OTC bulletin board. There are many advantages to a public listing of this type, including an increased liquidity of company shares for owners, higher share price and higher company valuation, greater access to the capital markets, and the ability to use shares as incentives to attract better employees, to acquire other companies using the stock is an asset, and as a harvest or exit strategy for owners. However, IPO's can be difficult for many reasons, including problems finding a market maker, and depending on what level of OTC market you're shooting for, it can be costly, time-consuming, demand a lot of attention from management and owners, require a history of earnings and profits, and varying levels of regulatory paperwork and disclosure. A way around this is called the reverse merger. There are a few companies that specialize in this, including www.gopublicusa.com; www.taurusfp.com, and www.gopublicshellsreversemergers.com, and offer a less costly, and less troublesome access to OTC markets by simply buying a shell company that already has been listed with one of these exchanges. The way it works is fairly simple. A private company merges with the public company, and the company simply continues as the dominant successor entity. These listed companies are referred to as blank check companies, or as public shells. It is a way to go public quickly and at low cost. Depending on your cash flow, this may be an alternative route to gain access to the capital markets at low cost with little hassle. A similar strategy is called the registered spinoff, in which a private company goes public by issuing shares of their stock to an existing public company. This is also called a registered stock dividend distribution, and the results is to companies that share a public shareholder base. Once this occurs the spinoff company then finds a market maker, and lists independently. Typically only a small percentage of shares is listed in the spinoff, and for a very low cost it prepares the company for an IPO later. Socalled Form S-8 stock can be issued, and the only real barrier is that existing shareholders have to agree, and you have to accept the fact that financial markets now hold the company's future in return for a higher market value and easier access to capital. The other alternative mentioned earlier is the DPO. The DPO is not much different than crowd funding. For those interested, please see the section on Alt. Fin on this site, and its article on crowd funding. Nonetheless some unique information is given below. Those interested in DPO's might be interested in checking out the Startup Stock Exchange (SSX), established by the AngelList (these can be found at https://angel.co/startup-stock-exchange). The SSX is actually part of the platform for startups, and related to the DCSX (the Dutch Caribbean Securities

Exchange), operating out of Curacao in the Netherlands Antilles. 11,000 companies are registered with these entities, and the due diligence (the background and documents checking performed by financial institutions prior to OK'ing any investment in a company) performed by SSX gives a good general idea of what's required from a start up to successfully issue a DPO. It begins with a start up submitting an executive summary, and a $25 fee. If the company is accepted into the next round, it must submit a business plan and pay a fee of $500. SSX then helps hone the business plan, and even if the company doesn't make it it gets excellent advice and an idea of what is necessary for the company to attract investors. Once the plan is solid, and the company accepted into the next phase, SSX begins the corporate due diligence process for which it charges a fee of $2500. After due diligence is completed, if the company is successful, it must create a prospectus and submit it to the DCSX for approval. If it is approved the company pays an additional $2500, and is allowed to go public. Thus, the entire cost of the IPO through SSX is $5525. Of the original applicants very few are likely to make it through the entire process, with a 2 to 3% acceptance rate on average. Once listed, there is a monthly charge of $1250 covering custodial fees and fees to the regulator, which is a fraction of the millions of dollars companies pay for listing on major exchanges. Start-ups have to report biweekly, and investors are carefully vetted. A very similar organization is run by www.startups.com, which has over 20,000 investors and offers funding from $25,000 up to $1 million. It is essentially the same as other platforms like Seedrs, SeedInvest, AngelList, and GoldenSeeds, and equity crowd funding sites like Eureeca, Zoomaal, and Wamda. These are all places that match up investors seeking higher returns with companies seeking capital. Standards set by each company differ and the difficulty of obtaining financing varies from company to company. You now have an excellent overview of how a small company or start up can gain access to the financial markets. With persistence a successful company can indeed tap public money, though it is not an easy or quick route to riches. I hope this review was useful to you, and help your company obtain the money it needs. If you are reading this on a document sharing site, you can find many more such articles it will assist your company in getting the money you're looking for. Please visit the site at www.smallbusinessfinancingonline.com, and thanks for reading !