Staying Private or Going Public: Considerations for Growing Companies

Startup companies are usually privately held, meaning their shares are not traded on a public stock exchange and the company is not generally subject to the full reporting regime applicable to public reporting companies. Although becoming a public company can offer important advantages, founders, shareholders, and directors may have sound business reasons for keeping a company private.

Reasons a Company May Prefer to Remain Private

Reduced Public Disclosure: Privately held companies generally are not required to disclose publicly the same extensive information required of SEC reporting companies. Subject to applicable law and contractual obligations, they may have greater confidentiality regarding their financial performance, executive compensation, business strategy, material agreements, and operations.

Private status does not, however, eliminate all disclosure obligations. A private company may still be required to provide information to shareholders, investors, lenders, regulators, and taxing authorities.

Lower Compliance Burden: Public reporting companies must devote substantial financial and management resources to SEC filings, audited financial statements, internal controls, shareholder communications, and, if exchange-listed, applicable stock-exchange requirements. SEC reporting commonly includes annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K for specified events. (sec.gov)

Potentially Lower Liability Exposure: Directors and officers of both private and public companies can face liability for breaches of fiduciary duty, fraud, self-dealing, and violations of applicable law. Public companies, however, face additional exposure under the federal securities laws for materially false or misleading statements, material omissions, insider trading, reporting violations, and failures to comply with other public-company obligations. The SEC recognizes that a company and its management may face liability if public-company obligations are not satisfied. (sec.gov)

Greater Management Flexibility: Public companies are subject to federal securities laws, SEC rules, and—if listed—stock-exchange requirements. Certain transactions may also require shareholder approval. These requirements can reduce management flexibility and increase the time and expense involved in corporate decision-making.

Greater Control Over Ownership: A private company may have more control over how and to whom its shares are issued, subject to corporate law, securities laws, existing agreements, and shareholder rights. Remaining private can therefore help founders and existing investors manage dilution and changes in voting control.

Reduced Short-Term Market Pressure: Public companies are closely monitored by investors, analysts, and the financial media. Market expectations concerning quarterly performance can create pressure to prioritize near-term results. Remaining private may allow management to pursue longer-term strategies without the same degree of public-market scrutiny.

Access to Private Capital: Venture capital, private equity, growth-equity funds, strategic investors, family offices, and other private financing sources can enable a company to raise substantial capital without conducting an IPO. Private financing can nevertheless involve significant dilution, investor consent rights, board representation, liquidation preferences, and other negotiated restrictions.

When a Private Company May Become Subject to SEC Reporting

Under Section 12(g) of the Securities Exchange Act of 1934, a company may be required to register a class of equity securities with the SEC even if it has not completed an IPO.

For most companies, registration may be required if, on the last day of the company’s fiscal year:

1. The company has more than $10 million in total assets; and
2. The relevant class of equity securities is held of record by either:
   • 2,000 or more persons; or
   • 500 or more persons who are not accredited investors. (sec.gov)

These calculations are subject to important definitions and exceptions. For example, certain securities issued under employee compensation plans may be excluded from the holder-of-record calculation. Conditional exemptions may also apply to qualifying Regulation Crowdfunding and Regulation A securities. Banks, bank holding companies, and savings and loan holding companies are subject to different holder thresholds. (sec.gov)

Crossing the applicable threshold does not require the company to conduct an IPO or list its shares on a stock exchange. It may, however, require the company to register the relevant class of securities and begin filing periodic reports with the SEC. The company could therefore become a public reporting company while its shares remain unlisted and relatively illiquid.

Once subject to Exchange Act reporting, a company may be required to file annual, quarterly, and current reports and make information concerning its financial condition, operations, management, material agreements, executive compensation, and specified corporate events publicly available. The precise disclosure requirements depend on the company’s circumstances and filer status; eligible emerging growth companies and smaller reporting companies may use scaled disclosure requirements. (sec.gov)

A company approaching the Section 12(g) thresholds should evaluate its capitalization table, holder-of-record count, investor accreditation information, applicable exclusions, and reporting alternatives before the end of its fiscal year.

Potential Benefits of Going Public

Access to Capital: A registered public offering can raise substantial capital for expansion, research and development, debt repayment, acquisitions, and other corporate purposes. Public-company status may also broaden opportunities for future financing. (sec.gov)

Potential Liquidity: A public trading market may allow founders, employees, and investors to sell shares more easily. Liquidity is not guaranteed, however, and sales may be limited by lockup agreements, securities-law restrictions, company trading policies, market conditions, and the availability of buyers.

Acquisition Currency: Publicly traded shares may be used as consideration in mergers and acquisitions, potentially reducing the amount of cash required for a transaction. (sec.gov)

Employee Recruitment and Retention: Public-company equity and stock options may help a company attract, compensate, and retain employees. (sec.gov)

Visibility and Credibility: An IPO and public listing may increase brand awareness, publicity, and market recognition. (sec.gov)

Transparency and Investor Information: Public reporting provides investors with standardized financial and operational information that may assist them in evaluating the company. This transparency, however, also gives competitors and other third parties access to information that a private company might otherwise keep confidential. (sec.gov)

Conclusion

The decision to remain private, become an SEC reporting company, or pursue an IPO requires careful consideration of the company’s capital needs, shareholder base, financial condition, growth strategy, governance structure, and tolerance for regulatory and disclosure obligations.

Counsel from experienced securities lawyers can help a company monitor its Section 12(g) status, structure private financing transactions, manage its capitalization table, prepare for SEC reporting obligations, and evaluate whether and when a public offering is appropriate. Corporate Securities Legal LLP can advise companies, founders, directors, and investors on these considerations.