At Facebook’s annual F8 conference earlier this year, Mark Zuckerberg declared “the future is private” – but is that the case when it comes to investments?Driven by rising costs and onerous regulations, the decline in initial public offerings in recent years is unmistakable. There were 3,600 public companies listed in the U.S. as of 2017, which is less than half the number that were listed in 1997. While private companies face fewer reporting requirements and generally have greater freedom in executing their strategies, they’ve also traditionally had access to a smaller pool of investors than public companies. Now, digital securities are changing the equation.
The rise of digitization offers private companies a new path forward, allowing them to reach more investors while sidestepping many of the complexities of going public. As more companies choose to remain private, digital securities could help to tip the scales even further.
The Pros and Cons of Going Public
Historically, IPOs have helped companies facilitate additional financial growth or provided a way for business founders to access liquid capital. The allure of the IPO has also wooed plenty of businesses, indicating your brand had “made it” or succeeded in a significant way.
Because of the growing drawbacks of going public, however, IPOs can also be problematic because of:
- Sky-high costs. Between the expense of investment banking fees and the ongoing costs of managing reporting and other requirements, becoming a public company can be prohibitively expensive. IPOHub reports that the cost of going public can ultimately cost up to $7.1 million dollars, excluding underwriter costs.
- Cumbersome compliance and disclosure requirements. The administrative burden on public companies has only grown heavier in the wake of recent U.S. legislation. Notably, the Sarbanes-Oxley Act of 2002, designed to counteract the accounting frauds of the 1990s, has “added to the reporting and liability burdens imposed on public-company managers,” Bloomberg noted in an editorial last year.
- Difficulties in executing long-term strategy. When you constantly have to manage to share price, the public tends to become fixated on those prices, especially since quarterly reporting is required for all publicly traded U.S. companies. These reports are designed to ensure transparency between the company and the public, but can cause major difficulties when trying to manage company strategy long-term.
In light of these complications, remaining private is an increasingly viable strategy for companies. IPOs represented just 15% of venture capital exits in 2017, with mergers and acquisitions making up much more of overall activity. With more private companies considering digitization, growth in the digital securities market could continue to move the needle in that direction.
Will Digitization Keep More Companies Private?
In the past, many companies opted to go public instead of remaining private to increase fundraising abilities and reach a broader network of investors. However, digitization is helping to close the gap in these areas for private companies. As a digital representation of an asset like private equity, venture capital or real estate, digital securities allow issuing companies to:
- Tap into a global investor base. While private equity has traditionally only been available to investors with a personal connection to the deal, secondary trading platforms like Openfinance allow investors across the globe to buy and sell digital securities. For private companies, this means increased ability to finance growth from a broader set of investors – without all the requirements that come along with being a publicly traded company.
- Maximize valuations through the promise of liquidity. While it’s traditionally been difficult, if not impossible, to sell a stake in a private company, digital securities give investors a path to true liquidity. This flexibility may make these investments more attractive to investors, helping private companies raise more money.
- Simplify compliance. Digital securities are subject to all Securities and Exchange Commission regulations, giving companies peace of mind that they’re in compliance. Since many compliance requirements are handled directly through trading platforms like Openfinance, administrative burdens and costs are lower than in the traditional private securities market.
In an age of digitization, the ability for investors to exchange private equity efficiently and securely will ultimately allow more companies to pursue alternatives to an IPO. For these companies, the future is likely to be (and remain) private.