THE TWO PRINCIPAL METHODS TO GO PUBLIC IN THE UNITED STATES

There are two principal methods in the United States at this time to go public. The traditional way, called an initial public offering, or IPO, historically has required the services of a securities firm which underwrites the offering. Most underwritings are “firm underwritings,” which means that on the day that the registration statement goes effective, the underwriting firm commits to purchase all of the offering. Of course, because the securities firm is not of the business of rolling stock, but selling it for a commission, prior to the date of effectiveness the underwriting firm has already received preorders sufficient to fill the entire offering at the price set forth in the prospectus.. If the underwriting firm does not have the entire offering pre-subscribed, it will not proceed with the from underwriting.

A “best efforts” underwriting doesn’t obligate the underwriter to sell any minimum level of securities. The underwriting firm merely what must commit to use its ”best efforts.”

Through various factors which we will go into in subsequent posts, the willingness of brokerage firms to undertake firm underwritings, or even “best efforts” underwritings, declined dramatically in the early 1990s. As a result, the “reverse merger” was born as the most common method of going public. A public merger with a company which was already public became the dominant method for companies to go public. But, which is better?

It is not necessary to have an underwriter in order to carry out an IPO. Many companies can and do act as their own underwriter that is, they find their own purchasers by a variety of means, and are able to raise money in that manner. Nevertheless, there are various factors which continue to lead potential public companies to go the reverse merger route in going public.