The Cost of Being a Public Company
By William Cate
August 2004
[http://home.earthlink.net/~beowulfinvestments/]
[http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
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. If your company wants to list on Nasdaq, the cost will be an additional $500,000. Registration and listing costs have risen by about 30% 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
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.
To contact the author: Visit the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website:
[http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]