PUBLIC FINANCING FOR SMALL CORPORATIONS*

Abstract

ALTHOUGH THE difficulties encountered by small corporations in raising long-term capital have long been recognized and many suggestions have been made to alleviate these difficulties (one of which culminated in the Small Business Investment Companies), very little has been written on one of the major potential sources of such capital-public sale of securities. This study is a comprehensive treatment of public stock financing for small corporations. It is based principally on case studies obtained in the field by the author but also on mail surveys, a study of appropriate prospectuses, and published materials. The first part of the study considers the desirability and feasibility of public stock financing. Among the advantages found for such financing were the value of raising permanent funds without fixed charges or restrictions; the resulting improvements in credit rating and increase in borrowing power; the creation of a market useful in unfreezing the investment of old stockholders and helpful in settling estates; the ability to allow employees to participate in ownership; the facilitating of future sales of securities; the creation of a sounder basis for stock options; the use of a marketable security helpful in the acquisition of other companies; the value of the publicity received; and the management development which takes place as a result of the undertaking. Disadvantages of such financing included the high cost of flotation and the cost of capital; the assumption of new responsibilities; the time and effort involved; and sometimes the uncertainty of obtaining the desired funds. An almost complete lack of understanding of public financing and unjustified fears of loss of control were found among presidents of many corporations which were in a position for public financing but had never attempted it. Often the corporation presidents were unaware that the possibility even existed. In an attempt to remedy this situation, the author developed broad criteria by which the feasibility of public financing for individual companies could be appraised. For Regulation A issues ($300,000 or less), strong growth potential is