Go public via Spin-Offs
How Can You Become a Public Company Without Cost?
The 1934 Securities Act states that any private company with over 500
public shareholders is a public (reporting) company. In his book, Going
Public, Frederick Lipman, an experienced securities attorney, observes
that any public company may sponsor a private company by distributing
free stock of the private company to their shareholders. The industry
refers to a private company that goes public using this stock distribution
strategy as a Spinoff.
Why Will Public Companies Sponsor Spinoffs?
The public company sponsor usually gets 10% of the private company's
stock. The public company distributes half this stock (5%) to their
shareholders. By regularly paying their shareholders Spinoff stock dividends,
the public company keeps their shareholders. The public company retains
5% of the private company's stock as a corporate asset. This stock enhances
the net worth of the public company. The public company sponsor normally
pays the cost of distributing the private company's stock to their shareholders.
This makes going public a cost free service for the private company.
Why Should Any Private Company Go Public?
- Doing private placements is easier for a public company. Your company
can more easily convert your stock to cash.
- A public company can use its stock to buy corporate assets. By buying
cash-producing assets for your company's stock, you increase your company's
cashflow, without spending your company's money.
- When it comes time to sell your public company, the sale price will
be your company's share price multiplied by the number of issued shares.
The share sale price is usually greater than a sale price based on your
company's balance sheet.
- Business groups buying recently privatized Foreign Government industries
gain substantial insurance against a future Government nationalization
by becoming a US.public company.
How Does a Spinoff Compare With an Initial Public Offering (IPO)?
For an operating company, the average cost of doing an IPO is around
$750,000. It takes 18 months. Over half the private companies that decide
to go public with an IPO abandon the process before they become a public
company. In a Spinoff, the public company sponsor pays your costs. It
takes about four months for your private company to become publicly
trading. If you do an IPO, you're not required to distribute any free
stock to the public. However, most IPO underwriters price the IPO stock
at 15% below the net worth of the company. This effectively gives the
public shareholders 15% of the private company free.
Where Do Spinoffs Trade?
A Spinoff is a public company. It will trade over-the-counter (OTC),
if it doesn't qualify to trade on a stock exchange. The public companies
that regularly sponsor Spinoffs, usually arrange to have the new public
company trade on the NASD Automatic Bulletin Board.
Why Shouldn't a Private Company Do a Spinoff?
It's rarely cost effective to arrange a PUBLIC financing for a US Public
Company. Unless you can arrange a private placement, you must be certain
that your broker or consultant has the contacts to fund your Spinoff.
The sponsoring company usually wants a seat on your Board of Directors.
As Mr. Lipman comments, the sponsor can be legally liable for the misdeeds
of the Spinoff. It's nearly impossible to find a Spinoff sponsor for
a concept-company. The potential of legal liability ensures that sponsors
want quality operating private companies for this process. A public
company has a responsibility to its shareholders. As a matter of corporate
self-interest, the public company must insure a strong share price.
This responsibility adds ongoing costs to any company's operation. Whether
your public company trades OTC or on the NYSE, investor relations will
be part of your annual expenditures.
Why Aren't Spinoffs Popular?
Every industry wants to sell products that make their members the most
money. The Spinoff saves you money. But, securities attorneys lose income.
U. S. brokerage firms make less money doing Private Placement than public
offerings. Financial printers lose money, etc. It isn't in the Industries
best interest to mention a Spinoff to the CFO of a private company.
Most OTC company insiders want to dump their stock quickly. The stock
in a Spinoff is restricted stock (subject to SEC Rule 144). Since insiders
can get free trading stock by buying a Trading Shell, they avoid Spinoffs.
Few public companies will sponsor Spinoffs because of the legal liability
problem. Spinoffs work, but they may not work for your company. Discuss
this business strategy with your attorney & accountant. Seek an
opinion from a business consultant or stock broker familiar with Spinoffs.
Knowing that Spinoffs exist means you have half your answer about using
a Spinoff.
