Sabanes and the Cost of Going Public in America
by
William Cate

Cost Rising Rapidly

A recently published study by Foley & Lardner show that the Sabanes-Oxley Act of 2002 increased the costs of being an American public company in 2004 by about 33%. It's tripled the costs of taking a U.S. Domestic Company public in the United States. GAAP Audit fees account for most of the cost increase. Due to Section 404, the average GAAP audit is now about $1 million. This means that GAAP audit costs are up from about $80,000 in 2000. Also, Sec 404 directs the U.S. Securities and Exchange (SEC) to adopt additional rules and internal controls to the GAAP audit process, thus the audit costs are certain to continue to increase in the coming years.

Time Lost

The time needed for American Corporate Management to comply with SEC rules and regulations has jumped by 556%, as measured by lost productivity. The average dollar cost is now about $1.1 million. This is up from $200,000 in 2000. The cost of corporate governance has risen 223%. At this point, about 20% of the existing U.S. public companies are considering going private.

Rampant Fraud

The 2002 Sabanes Oxley Act was the result of the WorldCom and Enron Stock Audit Scandals. I strongly favor a SEC policy that would consistently file felony charges against all Stock Market swindlers. In fact, the SEC takes action in about 10% of the stock market fraud cases. With the odds supporting the crooks, fraud is rampant in the Market. It makes little sense to me to increase regulatory compliance costs by 33% and triple the cost for Domestic Companies to go public in the United States. However, wisdom is rarely an attribute of any Government action. And "doing something" has more political mileage than almost anything else.

Average Costs

So what are the 2005 average costs of doing an IPO in the United States? Applying the Foley & Lardner study and inflation at 6%/year to my "American Going Public Costs" article of 2000, here is the current cost estimate:

Pre-IPO Costs $390,000
Legal Costs $227,500
GAAP Audit $1,000,000
Printing & Mailing $130,000
Translation $40,000
Market Prep Costs $125,000
Investment Bankers $65,000
Consultants $65,000
Moody's or S&P $7,500
Blue Sky Fees $25,000 (Calif only)
Transfer Agent $2,500
Mgmt & Admin $1,100,000
SEC Filing Fee $5,500
Taxes $15,000 (Estimated)
Total $3,133,000

Underwriting Costs

The underwriting cost is a function of the money raised in the IPO. The NASD allows up to 18% in costs. If the gross revenue from the IPO is $10 million, this is an underwriting cost of $1.8 million.

Here's how the costs breakdown:

Non accountable Expense 3%
Accountable Expense 5%
Discount 10%
Company supplied IPO buyers usually 50% (10%-90%)
Commission 5% - It's paid by the brokerage firm client and doesn't affect the money received by the company.

Foreign Companies Pay Far Less

It's still true that it's less costly for a non-American company to go public in the States than for a U. S. Domestic Company. The money savings relate to lower levels of legal responsibility for the filing attorney doing a 20F filing rather than an SB2 filing. The non-American company can use an auditor and an audit method that is accepted in their local country. This saves money against paying an American Accounting Firm a million dollars to do a GAAP audit.

Reverse Mergers Dead In the Water
As noted in two of my recent articles, on July 19, 2005, the U.S. Securities and Exchange Commission (SEC) closed the door on reverse mergers and trading shell strategies with SEC Rules 33-8587 and 34-52038. If your company can't afford $3 million to go public and a further couple of million a year to comply with the Sabanes Oxley Act, you might want to consider the VCP Strategy. Visit [http://home.earthlink.net/~beowulfinvestments/]

Your Spending Choices

No going public approach is perfect. But spending less than $100,000 to go public and less than $100,000 annually to comply with the SEC rules makes more sense than spending over $3 million to go public and about $2 million/year to remain a public company. There are many other benefits, as well. Talk to me. Email me at: Beowulfinvestments@Earthlink.net



About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]