What are the main drawbacks of IPOs?

What are the main drawbacks of IPOs? 

Ans. Main drawbacks of IPOs are as follows: 

(a) There are a number of reasons why a company may opt not to go public, especially if it has another way to raise capital. Going public is an expensive process. Typical expenses associated with a public offering include legal and accounting fees, filing fees, travel costs, printing costs and underwriter’s expense allowance. 

(b) Going public can also be an extremely difficult process, especially if the business and its management are not familiar with the registration process. 

(c) The company will need to put all its business affairs in order and the day-to-day business operations will likely be disrupted. 

(d) Another disadvantage of going public is that public companies operate under close scrutiny. The prospectus reveals substantial information about the company including transactions with management, executive compensation and prior violations of securities laws. It will affect privacy of the company. 

(e) Public companies must comply with reporting requirements under the Exchange Act of 1934 as soon as the registration statement becomes effective. Complying with these reporting requirements can be expensive. 

(f) There is also an increased risk of exposure to civil liability for public companies, executives and directors for false or misleading statements in the registration statement. 

(g) In addition, officers may face liability for misrepresentations in reports filed with the SEC, for disclosing false information about the company or for insider trading. 

(h) Public companies are also at risk of takeover attempts. It is generally advisable for the company to implement certain anti-takeover measures such as a staggered board of directors.