The following data is taken from “Going Public” by James B. Arkebauer (1994) and the IPO cost website at: http://www.intranet.ca/~tgil/p2.html
You should keep in mind that costs vary based upon the complexity, the size of the underwriting and the history of the private company.
The following IPO costs would be reasonable for a company with over $2 million in gross revenues and a 3-5 year operating history. A startup company would pay less than half this estimate to do an IPO.
In some cases one or both sources acknowledge a cost listed below, but fail to offer an estimate. In those cases, I’ve supplied an estimate based upon my IPO experience.
- Pre-IPO Costs – $300,000
- Legal Costs – $175,000
- Accounting – $80,000
- Printing & Mailing – $100,000
- Translation – $30,000
- Market Prep Costs – $90,000
- Investment Bankers – $50,000
- Consultants – $50,000
- Moody’s or S&P – $6,000
- Blue Sky Fees – $20,000 (California only)
- Transfer Agent – $2,000
- Mgnt. & Admin. – $200,000
- SEC Filing Fee – $5,000
- Taxes – $15,000 (Estimated)
- Total – $1,123,000
The underwriting cost is a function of the money raised in the IPO. The NASD allows up to 18% in costs. If the gross revenue from the IPO is $10 million, this is an underwriting cost can be as high as $1.8 million.
Here’s how the costs breakdown:
- Non accountable Expense 3%
- Accountable Expense 5%
- Discount 10%
The Company insiders are often required to supply IPO buyers. The norm is the company insiders’ supply 50% of the IPO buyers. I’ve seen ranges of required buying from10% to over 100%.
The Client Brokerage Commission is often 5% on IPOs. It’s paid by the brokerage firm client and doesn’t affect the money received by the company.
These costs rise by about six percent per year. As long as the present Bull Market persists, these costs will continue to rise. There are ways to reduce these costs. I offers one alternative at [http://home.earthlink.net/~beowulfinvestments/]
Relatively few companies seek practical advice about the equity process. They rely on their attorneys, auditors and underwriters for help. This practice contributes to the fifty- percent failure rate among companies seeking to do an IPO. Taking a company public in the States is a costly project. You can cut your costs by using alternatives to doing an IPO. But, the costs remain high.
Seek to go public based upon flat fees, not hourly rates. This limits your risk to the agreed upon fees. Find someone who can package the entire registration and listing service for you. It’s always cheaper to buy the complete service rather than the individual parts. The supplier is taking several companies public and gets better prices from professionals for their services.
It’s less costly for a non-American company to go public in the States than for any U. S. Domestic Company to become a U.S. public company in America. The money savings relate to lower levels of legal responsibility for the filing attorney doing a 20F filing rather than an SB2 filing. The non-American company can use an auditor and an audit method that is accepted in their local country. This saves money over paying an American Accounting Firm to do a GAAP audit.
There are other savings for non-American companies trading in the United States. They include the fact that the SEC does not require quarterly filings (called 10Qs), nor is an annual shareholders report or meeting. I believe that clear, concise communications with shareholders is vital. I believe that both positive and negative information needs to be shared in a timely manner. I doubt the SEC requirements for 10Qs and shareholder reports is the most cost effective way to achieve these goals.
Historically, the Over-the-Counter and Over-the-Counter Bulletin Board (OTCBB) are the easiest and cheapest places to list your shares. This market has a bad reputation. My advice is seek to list your shares on a Regional Stock Exchange as soon as your company meets the regional stock exchange’s listing requirements.
Epilog: Since March 2000, the Enron, Tyco International and WorldCom stock scandals have driven the cost of doing a GAAP audit upward. Inflation continues and the cost of doing an IPO has risen substantially in the past four years. (5/04)
You can contact William Cate at the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/]
About the author
William Cate has his BA & MA from St. Louis University. He has taught at several colleges and universities. He regularly lecutues on equity finance topics around the World. In 1981, he formed Beowulf Investments, a risk capital fund that has done PIPE finacings for over 20 years. He assists companies seeking to go public in the United States.