Key Takeaways

  • A publicly held corporation sells shares to the public on stock exchanges, offering broader access to capital.
  • These corporations are subject to strict disclosure, governance, and compliance requirements enforced by the SEC.
  • Public corporations offer liquidity and prestige but come with increased scrutiny and regulatory burdens.
  • Shareholder rights and protections are more structured in publicly held corporations compared to private ones.
  • The IPO process transforms a private company into a public one, requiring extensive financial and legal disclosures.

A publicly held corporation is a corporation whose stock is sold to and owned by the public instead of private investors.

Basics of Publicly Held Corporations

Several legal business forms may be created, including corporations. Corporations are created when a specific state grants a corporate charter. Unlike other types of businesses, corporations are legally separate from their owners.

Because corporations are considered to be legal persons, they have the ability to accomplish several tasks:

  • Make contracts.
  • Be a party to an agreement.
  • File a lawsuit against another person or company or be sued themselves.

Corporations have their own privileges and rights that are different from company owners. Corporations also have different liabilities from their owners. You can choose from several different corporate forms. However, almost all corporations are formed for the express purpose of transacting business.

One type of corporation is a publicly held corporation. When a corporation's stock is owned by the public, it is considered a publicly held corporation. Corporate shares of a publicly held corporation will be listed on a public stock exchange such as the NASDAQ.

One of the drawbacks of a publicly held corporation is that the company is vulnerable to the fluctuations of the market. On the other hand, debt can be distributed amongst company shareholders, and these companies typically possess working capital beyond that which would be held by a private corporation.

Investing in publicly held corporations tends to be less risky than investing in closely held corporations. Closely held corporations and publicly held corporations, however, are similar in some regards.

The biggest difference between these two corporate forms is that there are a variety of securities laws that apply to publicly held corporations that closely held corporations may not need to observe. Some of these requirements include:

  • Strict requirements for governing the corporations.
  • Detailed procedures related to acquisitions and mergers.
  • The need to periodically disclose information about the corporation.

Key Characteristics of Publicly Held Corporations

A publicly held corporation—also referred to as a publicly traded or public company—is owned by shareholders who acquire equity through public markets such as the NYSE or NASDAQ. Unlike private corporations, whose shares are closely held, public corporations offer their stock to any investor, typically through an initial public offering (IPO).

Key traits of publicly held corporations include:

  • Shareholder Ownership: The general public owns the company through purchased shares.
  • SEC Oversight: Companies must register with the U.S. Securities and Exchange Commission (SEC) and comply with rigorous disclosure and reporting obligations.
  • Liquidity: Shares can be readily bought and sold on public exchanges, offering liquidity for investors.
  • Transparency: Financial statements and other operational data are made public to ensure accountability to shareholders.
  • Separation of Ownership and Management: Corporate governance is typically handled by a board of directors, with professional managers running day-to-day operations.

Advantages of Being a Publicly Held Corporation

Publicly held corporations benefit from several unique advantages, including:

  • Access to Capital: The ability to raise large sums of money by issuing shares or bonds.
  • Market Visibility and Prestige: Public status can enhance brand recognition and corporate credibility.
  • Share Liquidity: Investors can easily trade shares, attracting a wider pool of potential investors.
  • Mergers and Acquisitions (M&A): Public companies can use stock as currency for acquisitions.
  • Attracting Talent: Stock options can be offered as incentives to employees and executives.

Disadvantages and Challenges of Public Corporations

Despite their benefits, publicly held corporations face several downsides:

  • Regulatory Burden: Compliance with SEC reporting rules is time-consuming and expensive.
  • Loss of Control: Founders and initial owners may lose control due to shareholder voting power.
  • Short-Term Market Pressure: Public companies often face pressure to meet quarterly earnings expectations, sometimes at the expense of long-term goals.
  • Increased Scrutiny: Public exposure can invite criticism from shareholders, analysts, and the media.
  • Cost of Going Public: The IPO process is expensive and involves legal, accounting, and underwriting fees.

How a Private Company Becomes Public

A private company becomes a publicly held corporation through an Initial Public Offering (IPO). This process includes:

  1. Preparation: Conduct internal audits and hire advisors (investment banks, legal counsel, auditors).
  2. Filing with the SEC: Submit a registration statement (typically Form S-1) disclosing financials, risks, and business strategy.
  3. Marketing: Roadshows are conducted to attract potential investors.
  4. Pricing: Investment bankers help determine the offer price based on demand and valuation.
  5. Trading Begins: Shares are listed and sold on a stock exchange.

Post-IPO, the company must adhere to strict reporting standards and maintain transparency with investors.

Publicly Held vs. Privately Held Corporations

As you may suspect from their names, privately held corporations are owned privately. In most circumstances, this means that the company is privately owned by the people who founded the company, the company's management team, or an investor group.

Publicly held corporations are owned in part or whole by the public. During an initial public offering (IPO), the company will sell shares publicly, and the people who purchase these shares will have an ownership stake in the company. Besides how they are owned, the biggest difference between public and private corporations is their requirements for public disclosure.

In the United States, the Securities and Exchange Commission (SEC) requires that public companies that sell their stock on public exchanges file earnings reports on a quarterly basis. The purpose of filing these reports is to make sure that shareholders have current information on the company's financial standing.

In addition to mandating quarterly earnings reports, the SEC governs corporate stock offerings. For instance, this agency demands that corporations register their stock offerings and that a prospectus is used to describe the offerings. Information about stock offerings must be provided to the public and corporate shareholders.

Privately held companies, on the other hand, do not need to meet any disclosure requirements, meaning reporting the financial status of the company is only done at the corporation's discretion. The biggest advantage that publicly held corporations have over private corporations is that they can easily raise capital by selling bonds or stocks. This allows for the expansion of the company or the ability to take on large projects.

With a privately held corporation, the primary benefit is that the management team does not need stockholder approval before making company decisions. In addition, private corporations do not need to disclose financial information to the SEC. Private companies, however, are not able to raise capital using financial markets. If the company needs to expand, they would need to seek private funding.

These corporations also have different purposes. The goal of a publicly held corporation is to generate shareholder profits, while private companies are focused on lowering the tax burden on owners. A mistake that many people make is assuming that privately held companies are usually small. In reality, a variety of large corporations are privately held, including Bloomberg, Dell, Mars, and Koch Industries.

Shareholder Rights and Protections

Shareholders of a publicly held corporation typically enjoy broader rights and legal protections compared to those of privately held corporations. These include:

  • Voting Rights: Shareholders vote on corporate matters, including board elections, major acquisitions, and policy changes.
  • Access to Information: SEC regulations ensure that shareholders receive timely and accurate financial data.
  • Dividends and Earnings: Shareholders may receive dividends and benefit from stock appreciation.
  • Litigation Rights: Investors can bring class-action lawsuits if the company engages in misconduct or issues misleading disclosures.

Compliance and Reporting Obligations

Publicly held corporations must follow stringent compliance frameworks to protect investors and maintain market integrity:

  • Quarterly and Annual Filings: Companies file 10-Q (quarterly) and 10-K (annual) reports with the SEC.
  • Sarbanes-Oxley Act (SOX): Enforces internal control requirements and penalizes fraudulent financial practices.
  • Proxy Statements (DEF 14A): Used for shareholder meetings and voting issues.
  • Insider Trading Rules: Company insiders must report their stock trades and avoid trading on non-public information.
  • Ongoing Disclosure: Any material changes in financial condition or operations must be disclosed promptly through Form 8-K.

Frequently Asked Questions

  1. What is a publicly held corporation?
    A publicly held corporation is a company whose shares are traded on public stock exchanges and owned by public shareholders.
  2. How does a company become publicly held?
    Through an Initial Public Offering (IPO), a company sells its shares to the public and becomes subject to SEC regulations.
  3. What are the advantages of being a publicly held corporation?
    They include access to capital, liquidity for shareholders, increased visibility, and the ability to attract top talent.
  4. What regulations must public companies follow?
    They must comply with SEC disclosure requirements, submit quarterly and annual reports, and adhere to the Sarbanes-Oxley Act.
  5. Can a publicly held corporation go private?
    Yes, through a process called “going private,” often via a buyout where all public shares are purchased and the company deregisters with the SEC.

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