Recent corporate scandals have toppled the likes of Enron, WorldCom Inc and Adelphia Communications Corp., contributing to the overall decline in our capital markets and leaving in their wake countless victims, including employees, vendors, customers and investors. During the period from March 2000 to July 2002, public companies lost $7.7 trillion in market capitalization.

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Yet well-intentioned regulators and lawmakers, attempting to stop this downward spiral may have created an additional class of unintended victims, small to midcap public companies. With the enactment of the SarbanesOxley Act of 2002 and corporate governance reforms looming on the horizon for the major stock exchanges and Nasdaq, the playing field for public companies, already trending against small and midcap public companies, has forever been altered.

With few exceptions, the requirements imposed by Sarbanes-Oxley and other touted "solutions" apply to both large and small public companies. The increased burden of compliance is impacting smaller companies disproportionately, not only in terms of expense but also in terms of executive time and potential liability. Just as each company weighs the costs and benefits of initially going public, now is the perfect time for smaller public companies to examine the costs and benefits of staying public or of going private.

With the overall decline in the markets, many of the reasons for becoming a public company no longer exist, especially for smaller public companies:

Future stock issuances and their ability to raise capital are questionable.

Depressed stock prices decrease the attractiveness of utilizing stock as acquisition consideration.

Decreased analyst coverage for smaller companies often negates the increased liquidity that is typically associated with publicly owned shares.

Stock options, for the most part, have lost their luster as a means of attracting and retaining qualified personnel.

The prestige of being publicly held has been greatly damaged by the barrage of corporate scandals and their now seemingly mandatory "perp walks," where once-highly regarded CEOs and other executives are paraded in handcuffs before a bevy of television cameras.

Add to these factors the increased costs and risks to -- and additional requirements for -- remaining public associated with the new corporate governance measures imposed by or resulting from Sarbanes-Oxley and other reform measures.

And the regulators aren't finished. The Securities and Exchange Commission recently said it would be examining the entire proxy process, which is likely to result in making it easier for shareholder activists to avail themselves of the process at the expense of the company and weaken management's control of the process. Additionally, the Financial Accounting Standards Board has made it clear that it is all but certain to adopt a standard requiring the expensing of options. Also, measures are being considered that could require the mandatory splitting of the positions of chairman and chief executive officer between two individuals.

Advantages to discontinuing public company status include:

Significant cost savings.

Executives with more time available to devote to managing the company instead of spending time on compliance issues.

Management's ability to focus on long-term results and research and development, rather than on the heavily scrutinized quarterly results.

Away from the scrutiny of public shareholders, a company may reduce its overall litigation exposure, and its officers and directors are less likely to be exposed to personal liability.

Accessible sources of capital, including private equity investment funds that are sitting on the sidelines looking for the right candidates in which to invest funds, estimated to total more than $120 billion.

Flexibility afforded to private companies as to choice of entity (i.e., S corporation or LLC status vs. C corporation status) and other corporate governance and operational aspects (e.g., action by written consent or telephone, privacy regarding executive compensation, etc.).

The "typical" going private candidate:

A company that may not be making a profit but has the potential to do so (potential which is not recognized by the market and subsequently enables a buyout group to pay a reduced price). If profitability appears not to be attainable without some form of restructuring, the company is an even more likely candidate.

A company with a limited following by analysts and institutional investors usually because its stock is too thinly traded.

A company with a strong cash position relative to its market capitalization and little debt, with strong financial controls in place.

A company with a strong business model with good prospects for positive cash flow even though revenues may not be consistent.

A company whose employee stock options are significantly "out of the money."