Building Wealth by Going Public in U.S. Capital Markets

Going public in the United States can help you build your fortune and wealth in many ways.

What concerned the Management of Chinese Company most when they decided to take the company public was that could the company be approved by SEC and go to public finally after they spent a lot of time and money? We have consulted with several attorneys, and finally chose Mr. Michael Williams, whose enthusiasm and expertise made us confirmed our determination to take the first step.   

It is really a tough project for a Company which germinated from Chinese background to merge into Western Environment, to comply with the SEC requirements and to complete all the steps to go public. Mr. Michael Williams is very concerned about our company. He not only studied on our actual conditions but also traveled to China to investigate our company. He is always willing to help us which make the process less intimidating. With the help of Mr. Michael Williams, we’ve been approved by SEC in 6 months. Both the management and Chinese staff of our company are impressed by Mr. Michael Williams’ professional dedication, and his passion to build a international gateway for Chinese Company go to the world.   

Mr. Michael Williams is the friend and counselor of Chinese Company. Now we have engaged him as our company’s perennial legal counsel.

Mr. Williams has the talent to explain the complicate legal procedure and the model he designed in an easy and clear way, which let us feel very understandable and comfortable to follow the procedure, step by step reach our goal. During the approval process, we were also impressed by Mr. Williams’ quick response to all our questions. 80% of our emails were replied almost right away, the rest were in one day.

The United States is home to the largest capital markets in the world. Accessing the U.S. capital markets can help you raise money for your company. However, you can only access this capital if you correctly position your company and you take appropriate rather than inappropriate actions to do so. 

One of the first questions we are always asked by our potential clients is: Can you find someone to help raise money for me in the United States if you help my company go public? The answer is yes, but only if your company meets certain criteria. Those criteria are:

Larger, institutional type investors or hedge funds and the broker/dealers that work with them will only raise money for your company if you have proved your business plan. How do you show them you have proved your business plan? Your company must have been generating significant revenues and profits.

What are significant revenues and profits? In difficult economic times, the answer is generally $30 plus million in annual revenues and $7 plus million in profits for your last fiscal year. These must be actual, proven historical numbers. They are not projections of what you expect to do this fiscal year. They are what you actually did last fiscal year. And they must be proven. This means they must be shown in audited financial statements by a qualified U.S. accounting firm.

A history of significant revenues and profits alone is not enough. You must show that you have strong, experienced management that is capable of guiding the company to continued growth of revenues and profits. Large institutional investors, hedge funds and broker/dealers are looking for companies that have a reasonable expectation of 20% annual growth year-over-year.

3. Demonstrated ability to become an SEC reporting company and to keep current with all SEC filing requirements, including making all required disclosures and producing all required financial statements consistent with SEC filing deadlines.

Large institutional investors and hedge funds will not invest in your company and broker/dealers will not raise money for your company unless you are an SEC reporting company. The requirements to become an SEC reporting company and the requirements of the SEC after you become a reporting company are discussed in detail in this book. If you want to raise money from these sources or have them raise money for you, you must also show that you have the ability to become an SEC reporting company and to keep current with all SEC filing requirements, including making all required disclosures and producing all required financial statements consistent with SEC filing deadlines.

Even if you meet all the requirements for raising money in the U.S. capital markets discussed above, not everyone that offers to raise money for you is legally qualified to do so under U.S. law.

You may only pay a commission or some other form of transaction based compensation, meaning compensation that is based upon the success of your actually raising money, to an entity that is broker/dealer registered with the U.S. regulatory body called the Financial Industry Regulatory Authority, or FINRA.

You cannot pay "finders," "business brokers," and other similar individuals or firms to help you raise money.

Individuals and firms that are not registered broker/dealers may offer to provide you with one or more of the following services if you pay them a commission or any other fee based upon the success of the transaction: 

• Finding investors, even in a "consultant" capacity
• Making referrals to investors
• Engaging in, or finding investors for private placements
• Effecting securities transactions for the account of others for a fee, even when those other people are friends or family members
• Acting as "independent contractors," but are not "associated persons" of a broker-dealer
• In general, these persons are all acting as unregistered broker/dealers in that they:
• Participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction
• Receive compensation for participation in the transaction depending upon, or related to, the outcome or size of the transaction or deal or other transaction-related compensation

All of these activities are illegal under U.S. law. Do not sign a contract with anyone other than a finra registered broker dealer to provide you with these services. If you do, you are breaking the law and could suffer sever penalties.

If you have a fundable project, there are plenty of capital sources who will fund your deal without wanting an up-front fee. It will of course involve some extra work and time, but it will be well worth it in the end.  

If you are experienced enough to put a multi-million dollar deal together then you should be experienced enough to know when you are being "taken." All you need to do is type their name into Google and if they are a scammer you will get pages of get pages of complaints about them. 

We do not buy it that the entrepreneur should pay for due dilligence. It should be a cost of doing business for the lender. "Due diligence" costs should be built into the cost of the capital by the lender, and added on with closing costs and deducted from the proceeds of the financing. 

Know that an up-front fee is not the determiner for a sound capital source to finance a deal or not finance a deal. It is a rare case when the quality of the deal does not prevail. Capital in the accounts of institutional investors such as hedge funds is a liability unless it is earning money for the investors. Institutional investors have to get their money working and are often as anxious as the entrepreneur is to get the financing.

If you have a good deal, patience, and perseverance, there is always another investment source. When you have to pay an up-front fee for someone to look at your deal, chances are pretty good that you do not have a fundable deal and you have a silver tongue devil by your side. 

Be careful, make life easy for yourself and pledge never to pay an up-front fee. Spend some time making your deal fundable by doing the things we describe above.

Going Public in the U.S. capital markets can still help you raise money even if you don’t meet all of the requirement for having others raise money for you described above.

You can raise money yourself. But you will have a much easier time convincing investors to give you their money if you go public in the U.S. capital markets. Why?

Investors like to invest in a company with credibility. As a U.S. public company, particularly an SEC reporting company, you establish instant credibility with investors and differentiate your company from the hundreds or thousands of other that are trying to convince investors to give them rather than you their money.

Investors like to have the ability to sell their stock when they want to or need to. This is called “liquidity.” There is no greater source of liquidity for your investors than the U.S. capital markets.

One common misconception of our clients, however, is that once they have a Ticker Symbol and their stock is trading on a U.S. capital market, the company can take its own treasury stock to a broker/dealer and sell it directly into the market. Your company cannot do this. You cannot sell your company’s securities directly into the market. Only shareholders who have already invested in your company can resell their stock into the market. You must sell directly to investors in non-market transactions.

Becoming a public company in the U.S. capital markets may significantly increase the value of your company and thus your personal net worth. Sellers of private companies generally sell their business at an average of 3 to 5 times net after-tax earnings. Further, many times the seller must finance the purchase. Stock of a public companies may sell for 10 to 20 times earnings. For example, assume your company has annual after tax earnings of $5,000,000. At 5 times earnings, your company’s value would be $25,000,000. But finding an all cash buyer at this amount could be quite difficult. As a public company, if your stock trades at 15 times earnings, your company’s value would be $75,000,000.

You may read or hear that going public in the U.S. capital markets is an excellent exit strategy for you to cash out and make your fortune. It may be, but not so fast. First, the SEC has rules that severely limit the amount of stock you personally can sell into the market. Further, you cannot sell lots of your securities into the market in any short period of time. It will screw up your stock price and make your investors mad. The market will worry that your company is in trouble if you start to dump too much of your personal stock.   You may have to wait until some other company wants to buy your company buy buying your stock. This is a good strategy because, as we discussed above, you have made your stock much more valuable and thus can sell at a much higher price by becoming a public company in the U.S. capital markets. So yes, going public in the U.S. capital markets is an exit strategy, but you must think of it as a longer-term goal rather than a short-term immediate profit.

Do not underestimate the importance of the increased prestige and standing you and your company will enjoy as a result of successfully going public in the U.S. capital markets. 

You will gain prestige by creating a perception of stability. You and other members of management will gain significant personal prestige from being associated with a that successfully goes public in the U.S. capital markets.

By going public in the U.S. capital markets, your company can gain additional exposure and become better known. This can help in marketing goods and services. Increased credibility may mean increased customers and revenues. This can be helpful if you are in an industry customers and suppliers must make long-term commitments.

Once public, lenders and suppliers may perceive the company as a safer credit risk, enhancing the opportunities for favorable financing terms.

Going public in the U.S. capital markets increases your public presence in that you are more likely to receive the attention of major newspapers, magazines and periodicals than a private enterprise. Going public in the U.S. capital markets can get your company story out to the world and open an opportunity for potential future customers or strategic partners.

Accomplishing this task will make you stand out above other similar entrepreneurs in your region. You have done something that your competitors and other companies in your region have not. You may be able to leverage this into tax benefits and other incentives from the government. You may also be able to get banks and other lenders to lend you money because of your credibility and prestige. In addition, your publicly-traded stock may be more acceptable as collateral to secure loans. Your increased prestige may translate into increased sales or strategic business alliances.

Once again, we encourage you to look long term. Going public in the U.S. capital markets can bring you significant economic benefits that will help your company grow even if you cannot raise significant money from investors now or if you don’t meet the requirements to have others help you raise money in the U.S. By going public in the U.S. and taking advantage of potential economic benefits that may become available, you will be able to grow your company to a position where you can raise significant money from investors, even U.S. institutional investors or hedge funds, or find a U.S. FINRA broker/dealer to raise money for you.

Going Public in the U.S. Capital Markets Help Your Grow Your Company and Increase its Value by Facilitating the Acquisition of other Companies

One way to grow your company to a size where it will attract interest from large U.S. institutional investors, hedge funds and FINRA broker/dealers is to acquire other businesses. Why does going public in the U.S. capital market help you acquire other businesses?

Because you can pay for the other businesses with your company’s stock rather than your cash. Your company’s stock becomes an accepted form of currency for acquisitions.

If you are a private company, what owners of other businesses would want your stock as consideration for selling their business to you? You would take another company’s private stock as payment if you sold your business. They won’t either.

But go public in the U.S. capital markets and this all changes. You have prestige and credibility. Your stock trades. The seller of the business gets the same liquidity that your investors are looking for. And because your stock trades, it is much easier to put a value on it when deciding how much of your stock you must pay to acquire another business.

Here again, we encourage you to look long term. Going public in the U.S. capital markets can bring you significant economic benefits that will help your company grow even if you cannot raise significant money from investors now or if you don’t meet the requirements to have others help you raise money in the U.S. By going public in the U.S. and taking advantage of the ability to grow your business through acquisitions, you will be better able to meet the requirements that allow you to be able to raise significant money from investors, even U.S. institutional investors or hedge funds, or find a U.S. FINRA broker/dealer to raise money for you.

Attracting and retaining talented management and employees will also help you increase your revenues. You can use stock and stock option plans to attract and retain talented management employees. 

If you go public in the U.S. capital markets, your stock can be issued as a performance based reward or incentive. This reward is more desirable if the stock has a public market. This market can result in liquidity and reward for your management and employees. A stock plan demonstrates corporate good will allows management and employees to become partial owners in the company where they work.

Rewarding your management and employees with stock after you go public in the U.S. capital markets can lead to increased productivity, morale and loyalty. This type of compensation is a way of connecting an employee financial future to the company success. 

Chinese companies, including our clients, continue to express an interest in bringing successful U.S. management techniques into their business. Go public in the U.S. capital markets can facility one such method called “open book management.”

Open-book management is a management technique pioneered in the U.S. by Michael Phillips in San Francisco. The most visible success was by Jack Stack and his team at SRC Holdings and popularized in 1995 by John Case. The technique is to give employees all relevant financial information about the company so they can make better decisions as workers. This information includes, but is not limited to, revenue, profit, cost of goods, cash flow and expenses.

• Give employees training to understand the financial information
• Give employees all relevant financial information
• Give employees responsibility for the numbers under their control.
• Give employees a financial stake in how the company performs.

In a company fully employing Open-Book Management employees at all levels are very knowledgeable about how their job fits into the financial plan for the company. However taking a company from "normal" to open is not as easy as just starting training classes on income statements and balance sheets. Employees rarely find it compelling to understand these numbers. In order to overcome this problem Open-Book Management focuses on a "Critical Number."

The number is different for every company but it is a number that represents a prime indicator of profitability or break-even point. Discovering this Critical Number is a key component of creating an open-book company. Once discovered then a "Scoreboard" is developed that brings together all the numbers needed to calculate the critical number. The Scoreboard is open for all to see and meetings take place to discuss how individuals can influence the direction of the "Score" and therefore, ultimately, the direction of the Critical Number. Finally a Stake in the Outcome is provided which can be a bonus plan that is tied to Critical Number performance or it can include equity sharing or both.