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Offering expenses for an initial public offering are generally substantial. The fees of the underwriter generally constitute the greatest offering expense. In many cases the indirect expenses associated with a public offering are likely to cost about as much as the direct expenses. Set forth below is list of direct and indirect expenses companies should anticipate incurring. Direct Expenses. Companies can research the direct expenses incurred in other public offerings by reviewing Part II of the registration statement of other offerings. Part II is the part of the registration statement that is filed with the SEC, but which is not included in the prospectus sent to investors. Copies of Part II from the other offerings can be obtained from the SEC. The primary direct offering expenses include SEC registration fees, NASD filing fees, stock exchange and NASDAQ listing fees, printing and engraving fees, legal fees and expenses for company counsel, accounting fees and expenses and filing fees and underwriters' attorneys fees for state securities law filings (blue sky). Set forth below are ranges for each of these categories of expenses. The expenses for most initial public offerings should fall within these ranges. However, some initial public offerings that are more complicated than normal may incur higher direct expenses.
* Denotes fees that are based on the size of the offering or the number of shares outstanding after the offering. Underwriters' Discount and Expenses. Technically, underwriters do not charge the company a commission. The underwriter purchases the stock from the company at a discount from the public offering price and then resells the stock to the public at the higher public offering price. The underwriters' discount for initial public offerings generally ranges from 6% to 10% of the public offering price. In addition, underwriters are often compensated in ways other than the underwriters' discount. These methods of compensation include the issuance of warrants to purchase shares of the company's stock in the future for a price equal to a percentage of the public offering price. The percentage generally ranges from 110% to 120%. Another form of underwriters' compensation is the requirement that the company enter into an investment banking consulting agreement which requires fixed monthly payments for a period of two to three years. The agreement may also include a right of first refusal for the underwriter to do future public or private financings for the company. This right of first refusal positions the underwriter to demand a payment from the company or to be included in the deal in a lesser capacity in return for waiving its right of first refusal. Finally, underwriters sometimes require the company to pay the underwriters' expenses. The largest expense is generally the fees of counsel to the underwriters. The fee reimbursement is often expressed as a nonrefundable unaccountable expense allowance. This permits the underwriter to charge a reimbursement that exceeds the underwriters' actual expenses. The primary reason for the indirect nature of some forms of underwriters' compensation is that the NASD has rules that prohibit underwriters from charging more than a fair fee for offerings. The NASD must approve the underwriters' fees for each offering. Consequently, some underwriters play a game with the NASD trying to justify indirect payments as not constituting a part of the compensation for the offering. The overall compensation package for underwriters varies from one offering to another and from one underwriter to another. Compensation is negotiated and there is no one rule for the entire industry. Indirect Expenses of the Offering. Companies often incur substantial indirect expenses in connection with their initial public offerings. The largest indirect expense is directors' and officers' insurance. The insurance premium may cost $200,000 and premiums in excess of $500,000 are not unheard of. Travel can also constitute a major indirect expense. The underwriters generally pay the travel expenses associated with the road show, but the officers of the company may have a dozen trips to New York and the west coast to sell the underwriters on doing the offering. Other indirect expenses include hiring additional staff or overtime for salaried employees to handle the administrative tasks associated with the offering and legal, accounting and other expenses incurred during the six months before the offering associated with preparing for the offering. Finally, during the time management is preoccupied with the offering it is often the case that the company will lose out on opportunities to increase sales. This cost of management time can be the most expensive indirect expense of the offering. |
