It is the desire of almost all companies to expand their operations. Despite this desire, there are many firms that are able to achieve expansion. Inadequate financing is among the factors that hinder firms from becoming bigger. A number of options have been developed to tackle this issue. Offering shares to the public is among the options that a firm that wishes to expand its operations may exercise (“How do Companies”, 2011). In this paper, the case of Randy’s Family which operates a business that wishes to go public is considered. Among other issues, the paper advises the family on the regulators of securities markets and the financing options available to startups.
Regulators of securities markets
To ensure that all players operate within the law and established standards, there are a number of agencies which serve as regulators in the securities markets. The Securities and Exchange Commission (SEC) is among these agencies (Little, 2014). Interstate public offerings and national stock exchanges are among the issues that the commission monitors. The SEC is also charged with the mandate of regulating corporate insiders to ensure that they conduct trading in a lawful fashion. The corporate proxy process is another issue that benefits from SEC oversight. Apart from the SEC, the securities markets in the US are also regulated by the Federal Reserve Board. Controls margin requirements are the main issue that this agency regulates. The SEC and the Federal Reserve Board have a national mandate. Various other bodies regulate the securities markets at the state and local levels. For instance, individual states regulate the markets within their borders (Little, 2014). In addition to the federal and state agencies, parties who operate in the securities markets also self-regulate. They do this mostly through the National Association of Securities Dealers (NASD). The main role that this organization performs is ensuring that the trading system is not compromised in any way. This organization sees to it that the credibility and the integrity of the system are safeguarded at all times.
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Financing of startups
It has been mentioned earlier that financial constraints hinder the efforts of companies to expand their operations. These constraints are mostly experienced by startups which struggle in their search for financing. There are numerous avenues for funding available to these firms. The resources of the founders of the startups are among these avenues (Zwilling, 2010). Those establishing a startup use their own personal property and resources to finance the firm. Angels are yet another source of funding. Essentially, these are friends and family who support the founders through the provision of funding. Venture capital funds are another avenue that startups can turn to for funding (Zwilling, 2010). These funds are intended to offer companies in need of funding with the momentum needed for growth. These funds are managed by individuals referred to as venture capitalists. To ensure that the funds that they provide are used responsibly, the venture capitalists serve on the boards of the companies that they have funded. Institutional investors can also inject funds into startups. These are organizations that desire to see growth and commit funding to startups.
Private placement and public offering
Private placement and public offering are the main methods that firms use to invite other parties to purchase shares. Despite sharing the same purpose of enabling firms to raise funds, these two methods are fundamentally different. One of the differences lies in the parties who are invited to purchase shares. In a private placement, a company invites a few private individuals. On the other hand, the general public is allowed to purchase shares in a public offering (Rocap, 2016). The other difference is that once securities have been offered to the public, a company is required to register the securities with the SEC. No registration requirement is imposed on companies that have opted for private placement. Instead of registering the securities with the SEC, a company is required to accredit its sales to its investors (Rocap, 2016). Private placement also requires that a firm engages the services of securities lawyers who prepare an “offering memorandum” which contains financial details and runs for 20-30 pages. The other feature that sets private placement from public offering is that in private placement, investors must satisfy certain wealth and income requirements and commit to refrain from selling shares to investors who do not satisfy these requirements.
Advantages and disadvantages of going public
Before going public, it is important for companies to consider the advantages and the disadvantages. Ensuring stockholder diversity is among the advantages. Public offerings enable firms to bring on board new and diverse classes of stockholders. Increase in liquidity is yet another advantage that going public presents (“Pros and Cons”, 2007). This means that public offerings allow firms to acquire more cash. The ease with which firms can raise funds in the future is another advantage that is enjoyed by those which go public. The establishment of firm value and increase in customer recognition are other advantages that incentivize firms to go public (“Pros and Cons”, 2007). As it goes public, a company can encourage its employees to purchase its stock. The company is then able to use the stock as incentive to promote loyalty and productivity. This is yet another advantage of going public.
Going public has its share of disadvantages. One of these is that a firm will be required to file numerous reports. This could compromise the security of sensitive information. The requirement that companies should disclose operating data is another demerit of going public. Firms which go public are also required to ensure that their officers reveal their holdings. Going public also makes it difficult for a firm to undertake special agreements with insiders. The time-consuming nature of managing the relations among investors is yet another disadvantage that could discourage a firm from going public. The possibility that a rights issue suffers poor trading is another disadvantage. Poor trading erodes the value of stock and does not offer a true reflection of the stock’s value. In conclusion, Randy’s family needs to consider all the issues discussed above before going public. It must understand that it will be subjected to intense scrutiny by the various regulators and that it will need to meet certain requirements. The family should also recognize that going public has its pros and cons.
References
How do Companies Raise Fresh Funds? (2011). Retrieved 25 th February 2017 from
https://www.morningstar.com.au/learn/article/how-do-companies-raise-fresh-funds/3316?q=printme
Little, K. (2014). Who’s Watching your Back in Stock Market? Retrieved 25 th February
2017 from https://www.thebalance.com/who-s-watching-your-back-in-stock-market-3141308
Pros and Cons of Going Public. (2007). Retrieved 25 th February 2017 from
http://treasurytoday.com/2007/09/the-pros-and-cons-of-going-public
Rocap, D. E. (2016). Structuring Venture Capital 2016e. New York: Wolters Kluwer
Law & Business.
Zwilling, M. (2010). Top 10 Sources of Funding for Startups. Retrieved 25 th February 2017
From https://www.forbes.com/2010/02/12/funding-for-startups-entrepreneurs-finance-zwilling.html
