A key driver of the American economy is the capital formation process that fosters innovation and new enterprises. Entrepreneurs raise capital to grow their business, innovate and create jobs. For many smaller companies, the expectation is to conduct an Initial Public Offering (IPO) and list on a stock exchange – hoping to build liquidity and visibility, and ultimately, long term shareholder value. While these efforts are well-intention-ed, many companies today find themselves putting off the IPO because they do not want to be overwhelmed by the increasing management time commitment, red tape and costs associated with being a public company.
A study from the IPO Task Force cited that the average cost for smaller companies to go public on a national exchange is $2.5 million. And that’s just the start. The ongoing cost to maintain an exchange listing averages $1.5 million per year. Listing has become a big-ticket commitment of time and capital for any company.
Why is the burden and cost of being an exchange listed company so high? One of the largest culprits is the annual legal, accounting, advisory and compliance costs associated with an exchange listing. Not to mention all the internal resources required to support this expert involvement and to comply with increasing complex exchange rules and processes. It is no surprise small companies are waiting longer or completely avoiding going public. Despite our best intentions, we have created a very time consuming and expensive proposition.
While some will argue for the value of all the experts required to list on an exchange, for smaller companies the burden and red tape can be crippling. As Management Guru Peter Drucker stated in the Effective Executive “Time is the scarcest resource and unless it is managed nothing else can be managed.” This sage advice holds true for leaders at large companies in the S&P 500, but is even more important for management teams at smaller companies with finite resources. When you look at the numbers alone it’s clear that this “one-size-fits-all” model is broken for many companies.
All hope is not lost. By looking at data-driven alternatives like the OTC Market, we can help companies alleviate much of the cost, time and complexity associated with being a public company. In future posts, we will share how we are working to make being public less painful for innovative U.S. and Global companies.