Private companies seeking to go public as a means of funding their growth need to have a committed source of funding before pursuing such a transaction. There is one legal way, and many illegal ones, which a company with insufficient funding sources can seek to raise additional needed capital for going public.
The ability to raise capital can be critical to business growth. Private companies with great potential or a record of success often seek to go public as a means of securing needed capital to fuel their expansion. But going public is simply a means of getting a ticker symbol so your investors – people who have already funded you by purchasing your stock directly from you – have a market to resell their stock. It is neither a guarantee of securing such funding, nor is it typically even possible to consider as an option unless viable sources of funding commitments are established in advance. Consulting an SEC attorney who can explain the viable options in details is vital to ensuring a smooth and legal path to securing funding.
The ideal, and indeed for smaller companies the only, true source of a solid advanced commitment is self-funding. An established company with more than a million dollars per year in net profits may be well positioned to attract serious interest on the part of investment professionals looking for solid growth opportunities. However, smaller companies must look to a group of committed personal contacts that would be willing to make an investment if the company could offer both transparency by being an SEC reporting company as well as liquidity and a solid exit strategy by going public.
So how does a company without sufficient profit or committed funding sources find the needed capital in order to go public? The law allows for companies to hire third parties for assistance in locating capital sources, but imposes a very strict requirement. A company may only hire “finders” or pay a commission or some other form of transaction-based compensation, meaning compensation that is based upon the success of actually raising money, to an entity that is a registered broker/dealer. Furthermore, the commission or fees must be paid to the broker/dealer entity and not directly to persons working for the broker/dealer.
It is easy to tell if an entity is in fact a registered broker/dealer by going to the website for the Financial Industry Regulatory Authority at FINRA.org. A search on this site also allows companies to see if the broker/dealer or the persons they are dealing with have ever had any legal or regulatory problems.
It is simply not legal to pay “finders”, unregistered “business brokers,” and other such individuals or firms to help raise money for going public. Companies are often solicited by individuals and firms that are not registered broker/dealers but which offer to provide services, in exchange for a commission or some other fee based upon the success of transaction, to take the company public; despite the fact that such offers are inherently illegal. Examples of such illegal services include finding investors (even in a “consultant” capacity), making referrals to investors, promoting a private placement, performing securities transactions for a fee (even when performed by friends or family), or acting as an “independent contractor” unassociated with a broker/dealer.
One notable exception is a special SEC rule allowing officers, directors and employees of a private company to sell securities without registering as a broker/dealer. The details of this exception and the many other opportunities and pitfalls in raising money to go public are published in the “Using Others to Raise Capital” discussion at GoPublicDirect.com.