Michael Sonnenfeldt in Inc Magazine.
The U.S. IPO market has a new company problem–especially with smaller players. The number of publicly listed companies peaked at around 8,000 in 1996 and has since fallen by nearly half. While larger companies like Anthropic, OpenAI, and SpaceX are expected to largely anchor this year’s IPOs, companies with less scale have struggled to make headway. One obvious reason? It’s expensive.
Going public can cost millions. To start, there’s underwriting fees, legal expenses and insurance to think about. As one example, Directors and Officers insurance (or D&O insurance) increases dramatically as companies make the jump from private to public.
But something called the Emerging Growth Company designation may offer a way in. A law known as the The Sarbanes–Oxley Act, passed after Enron’s collapse wiped out $74 billion in one of the
largest corporate frauds in U.S. history, aims to protect investors, but it’s also seen as a common deterrent to smaller companies hoping to go public because of the onerous compliance involved.
But there’s also a readiness factor that founders might be grappling with. “Cost is a big one,” says Sean Duffy, the CEO and founder of Omada Health, a health company that IPO’d last year that used the designation. “The public markets have a little bit of a lower tolerance for missteps and I think entrepreneurs here, think, ‘I really, really want to be ready.'” That’s where the Emerging Growth Company designation comes in.
What does an actual investor think?
Michael Sonnenfeldt, an entrepreneur and founder of the high-net-worth firm, Tiger 21, says that finding ways for a company to go public and get access to the public markets is ultimately a good thing–as long as there’s balance.
“In the end, we’re venture investors, and we’re interested in companies that have extraordinary upside and a easonable path to achieving that,” Sonnenfeldt says, later adding: “But we shouldn’t be so foolish as to think of this as some kind of Wild West rodeo where investors get snookered because the lower reporting requirements allow fraudulent sharks to take advantage of investors.”
Originally published in Inc Magazine: https://www.inc.com/melissa-angell/going-public-doesnt-have-to-cost-a-fortune-try-this-ipo-shortcut/91322863