Comparison of Public vs.

Private Companies

Topic IPO / Public Company Private Held Company

Initial Capitalization Rarely available through IPOs. Minimum size required Standard source of capital for start-ups

Growth Capital Once minimum size is attained, IPOs can provide Private sources of capital are available to fund
growth capital. Follow-on offerings can be done with growth. Sources of capital include friends &
decreasing complexity as company size increases. Also, family, angels, venture capital, private equity, &
public companies can quickly raise capital by private industry sources. Subsequent financing rounds
placements followed by registration of resales or are regularly completed.
exchange for subsequently publicly registered securities
with identical terms.

Availability of Capital to High High

Worthy Companies

Transaction time to Close

& Costs Costs vary, but expensive for small companies. IPO
lead time is the greatest. Depending on each companys
Significantly lower costs than IPO. In all but the
size, IPOs require 2 or 3 yrs. audited financials to file
smallest deals, audited financials will be required
with the SEC, followed by several months to complete
by rule or as negotiated, plus legal fees, &
the registration process. Transaction costs include
possible appraisal or engineering costs. Issuer
CPAs, securities counsel, blue sky fees & legal costs, &
usually must pay legal fees of investors.
underwriters discount plus fees of underwriters
Estimated time from start to closing is 3-6
counsel. O&G companies must have reserve reports
months.
from independent engineers. Estimated time is 6-12
months from start to close offering.

In many cases, registration requirements of state

State securities laws
Unless the company will be registered on an exchange
securities laws are preempted save for fraud
or another exemption is available, these laws apply, &
provisions.
registration is required.

Former SEC Chair Mary Jo White expressed

concern that disclosures in private placements are
Quality of disclosure to
Very good, even better as the company grows & inferior to public offerings. In general, I concur
investors as part of the
seasons. except where sophisticated investors control the
offering
information they receive pre-investment.

Low if investors believe all material fact were

disclosed. Absent fraud, sophisticated investors
Exposure of ownership & High, particularly if stock price falls post-IPO.
are less likely to become plaintiffs.
management to risks of Promoters of post-IPO companies that do not fare well
Unsophisticated friends & family investors may
lawsuits are subject to scapegoating by plaintiff investors.
not appreciate investment risks & are more likely
to sue when investments go bad.
High. Examples include:
Founders, major investor
Quarterly representatives,
& interim reports on Formsplus10-Q & 8-
Board membership
independent directors. Public companies are graded on
K. Founders & representatives of major investors.
the diversity
Annual of report
their boards.
on Form 10-K.
Annual proxy statement & stockholder meeting,
with the requirement for screening stockholder Venture capital & private equity funds generally
proposals for a vote at annual meetings. prefer corporations where the entity is likely to be
In addition sold. In instances where asset sales are likely,
Business structure Corporations, with tothegenerally
Del. Gen. accepted accounting
Corporation Law
principles (GAAP),state the PCAOB imposes further entities taxed as partnerships are often used to
being the preferred law for incorporation.
requirements. avoid double taxation, such as limited
Internal controls must be maintained and, in partnerships (LPs) and limited liability companies
larger public companies, attested by outside auditors. (LLCs).
Disclosure & defense of mgmt. & board
compensation
Extensive in excruciating
statutory & case lawdetail. Beginning
requirements in 2017,
apply,
public companies Corporate or other entity governance is based on
particularly under must disclose
Delaware law.the ratio of the
In addition, SECCEOs
&
annual compensation to the median annual statutory & case law requirements, but certain
exchanges require disclosures regarding other corporate
Corporate governance compensation of the companys other employees. entities, LPs & LLCs, can make significant,
governance matters. Further interest groups may urge
Smaller companies have reduced requirements. contractually-agreed variances to meet the desires
proxy votes and other action on topics such as diversity,
Special disclosures are required of owners and mgmt.
the environment, social justice, etc. if independent
directors are not 100% of membership of the audit,
compensation, and nominating committees. If a
director attends fewer than 75% of all board and
High, with meetings,
committee annual audits, quarterly,
this must annual, & interim Lower, with annual audits, plus other information
be disclosed.
Annual compliance costs
reports,
CEOplus and
proxy
CFO costs.
mustCould be as
certify >$2.0 MM.
to the accuracy of as required by investors.
the quarterly and annual financial information, etc.
(e.g., Forms 10-Q and 10-K).
Aggravating factors (which
Corporate governance requirements &
also increase compliance
disclosure.
costs & distract
managements from Code of ethics disclosure.
running their businesses) Conflict mineral disclosure.
Disclosure about SEC & Cong. concerns de
jour. E.g., cybersecurity, compensation, global
warming. Remember Y2K?
SEC restricts disclosure of non-GAAP
accounting measures often requested by analysts.
Required public disclosures may betray trade
secrets or information that the company may wish to
keep private, such as the loss of key customers or
problems with important technology.
Threat of stockholder activists who seek to
change or influence key management or business
strategy or to sell the company. These threats influence Low. In general, none of the matters shown to the
mgmt. both positively and negatively. left, unless negotiated with investors.
Stock exchange requirements, including key
requirements mandated by law.
Pressure to hit quarterly earnings targets.
Disclosure of insiders compliance with Sec.
16(a) of the 34 Act.
Review of the foregoing requirements by SEC
or exchange staffers in most instances having ltd. or no
private sector mgmt. or investment experience.
In computing corp. fed. income tax liab., public
companies cannot deduct the portion of annual
compensation paid to each of the CEO and three other
top paid executives above $1.0 million. Performance-
based compensation is exempt from this limitation.
Outside directors must be paid, usually
handsomely. Despite the obvious risks borne by public
directors, Delaware courts have allowed stockholder
Equitybased derivative lawsuits challenging director compensation For private corporations, the choices are
compensationfor as excessive and wasteful. 14 essentially the same as for public companies,
management Disclosure explaining and defending the board however, private company status & contractual
structure is required annually. arrangements may delay cashing out of these
Restricted stock of
Mergers grants,
publicincentive
companies stock
haveoptions,
been non- rights.
qualified
accompaniedstockbyoptions,
nuisance phantom
litigationstock grants.
in state courts For private companies taxed as partnerships (IRC
challenging disclosure and other issues under state Subchpt. K), carried interests may be used along
law.15 with phantom rights & other contractual bonus
Higher D&O liability ins. premiums. rights.
SEC takes the position that indemnification by
corporations or insurers of officers and directors for
Founders Liquidity securities laws violations is improper as against public
policy.
Public
Founders U.S.inmining
can sell marketcompanies
as affiliatesincluding
under Ruleoil and
gas must
144, compile
33 Act and disclose
4(a)(7), annually
or registration the amounts
rights (if they In most instances, contracts with investors require
paid to
have U.S.
been and foreign
agreed), unlessgovernments
lockups are fornegotiated.
commercial that founders cannot sell their equity sooner than
development
Post-IPO of oil,
market gas, and
liquidity may minerals.
limit ability of implementation of the investors exit strategy.
Coal mining
stockholders companies
to sell into the publicmust make safety-
market.
related disclosures.
Congressional and Executive Branch hectoring
of public companies management, boards, and
controlling persons.
Acquisitionofthecompany

Sales are now the primary exit strategy for

Acquisitions of public companies, including going
private transactions, are complicated involving SEC-
approved disclosures, sometimes two-step transactions,
fairness opinions, go-shop periods, dissenters rights,
& almost always stockholder litigation. The costs are
exorbitant.
private companies. Transactions are largely
negotiated in advance with all parties including
investors in the target agreeing to the terms.
Acquisitions by public companies can avoid pre-
closing SEC filings (e.g., 33 Act registration on
Form S-4) by all-cash deals. Also, acquisitions by
public companies in consideration of the
acquirers stock or other securities can postpone
SEC filings by using private placements of
securities accompanied by a post- closing resale
registration statement.