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The danger of lawsuits to IPOs

For many startup companies in Texas and elsewhere, there comes a time in their development where it makes logical sense to make an initial public offering. Often, an IPO that is successful can contribute significantly to a company's growth. However, there are some factors that can have seriously adverse consequences for a company attempting to make its initial public offering.

One major factor that can harm plans to make an initial public offering is that of ongoing litigation. While it's true that many companies have periodic bouts of litigation, being in the midst of a legal battle during the launch of an IPO can prove to be disastrous. It makes logical sense that investors may be concerned with companies that frequently litigate, as paying attention to legal battles can distract from business purposes. In addition, past business scandals involving major corporations have resulted in increased scrutiny of business practices.

In addition, a study from MIT revealed that there is a very real monetary disadvantage to ongoing litigation and patent litigation in particular. The study found that the direct cost of patent litigation between 2004 and 2012 was between $4 billion and $19 billion. It also estimated that, if not for frequent litigation, venture capital investments in these companies might have been $8 billion higher.

For businesses considering making an IPO, the issue of timing is extremely important. Consulting a lawyer who has experience in business law is advisable, as the lawyer can assess the state of a company and offer advice on the best time to try to raise outside financing from investors as well as providing counsel on compliance with federal and state securities law disclosure requirements.

Source: Inc.com, "How Lawsuits Can Sink Your IPO Ambitions", Jeremy Quittner, July 07, 2014

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