Liquidity is one of the main reasons companies seek to go public. If investors have the ability to cash out their shares then they are more likely to invest. However, the more money you raise the more dilution you have. Every company would like to sell shares when their company is trading at some astronomical PE, like Google. But that is not usually the case. For companies that are going public through the traditional IPO, underwriters will want you to raise as much money as they think the market can stand. This accomplishes two things: it allows the underwriter to receive larger fees because they are raising more capital and it gives the company a substantial cushion of “working capital.” Sometimes this is a good thing and sometimes it’s not so good. If you truly believe that your company is going to grow exponentially maybe you don’t want to raise a huge amount of money at a cheap price. On the other hand, if the markets sour as they did after 2000, you will be glad you have a substantial cash reserve sitting in the bank.

In a reverse merger, financings tend to be less dilutive because you are raising far less capital. In most cases the PIPE financing is providing the initial capital to fund the company. There are usually follow on financings that take place as the company progresses. The PIPE financing is usually structured as a unit deal, so the company has the ability to receive additional monies from the same financing at a higher prearranged price per share within twenty four months of the initial funding. It is the initial PIPE financing that usually sets the pricing of the shares of stock for trading.

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