Edited by Robert E. Litan
Chapter 4: Securities Litigation and Innovation
Richard A. Booth When a growing business seeks new capital, one of the most important issues for a potential investor is the exit strategy. While a new investor may be satisfied in some cases with the prospect of return from cash flow, in most cases investors will want the business to be sold or to make a public offering by which investors may tag along and sell their own shares. For the entrepreneur, the prospect of selling the business may not be attractive. Thus, the possibility of going public may be quite important even at a very early stage in the life of a business, even though most businesses are ultimately sold. But going public is expensive and fraught with risks. Aside from out-of-pocket expenses such as legal and accounting fees – and not to mention management distraction – a business that makes a public offering realizes only about 75 cents per dollar of value because of underwriting and pricing discounts. Moreover, once the business is publicly held, the cost of compliance with Securities and Exchange Commission (SEC) regulations is significant. As for risk, being publicly held means that the company is exposed to stockholder litigation based on a variety of federal causes of action. Indeed, it is likely that if there is any sudden decrease (or even increase) in stock price, the company will become the target of a securities fraud class action based on the theory that the news could and should have been disclosed earlier. In 2008, there were...
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