What Makes a Company Public: Everything You Need to Know
What makes a company public is the action to issue securities and trade stocks on some type of over-the-counter market or stock exchange.3 min read
What makes a company public is the action to issue securities and trade stocks on some type of over-the-counter market or stock exchange.
A public company is a business that has gone through the initial public offering (IPO) process to issue securities. In order to be classified as public, the company must also have its stocks traded on at least one exchange or market. During the IPO process, some companies choose to start by floating only a small percentage of stock shares to the public. However, going through this process means that company will allow the market to determine its overall valuation through trading on a daily basis.
Investors can purchase shares through the open market in a public trade deal for any public company. Public companies typically start as private companies. After the company meets the regulatory requirements to go public, the owner(s) can choose to take the business to that level in order to raise more capital.
Some of the most well-known public companies include:
- Procter & Gamble Co.
- F5 Networks Inc.
- Google, Inc.
- Chevron Corporation
What Does "Going Public" Mean?
When a private company submits an IPO, this action is referred to as “going public.” After going public, the business entity becomes owned and traded by members of the public. The main purpose of going public is typically to raise capital, which can aid in expansion efforts. Some venture capitalists use IPOs as exit strategies, allowing them to get out of their investment in a specific business.
Starting the IPO process involves reaching out to an investment bank and making decisions, such as the price of the shares and how many will be initially issued to the public. The investment bank involved in the process will act as the underwriter, which means they will own the shares and take the legal responsibility for the business. An underwriter's main goal is to sell the company shares to members of the public at higher prices than what the bank paid to the company owners.
Some of the deals between issuing companies and investment banks are valued at millions or even billions of dollars. Making the decision to go public shouldn't be taken lightly, as it does come with some pros and cons.
Advantages and Disadvantages of Public Companies
A public company does have some advantages over a private company. One of these advantages is an increased access to debt markets. Owners of the public company can also sell future equity stakes in the business, which can help raise capital and expand the company. After going public, a company can generate more additional revenue through various offerings. This process involves creating and selling more shares of the business on the market.
However, public companies are subject to more scrutiny and stringent regulatory requirements, resulting in less control for founders and majority owners. Certain reporting standards are mandated for public companies. These standards are enforced by government regulations and entities. Shareholders may also be entitled to receive notifications and documents that relate to business activities.
Other advantages of going public include:
- Increased business prestige
- Stronger capital base
- Diversified ownership
- Simplified acquisitions
Some of the disadvantages of going public include:
- Additional pressure on business growth in the short term
- Loss of control of the business, including making decisions
- Increased costs
- Additional restrictions placed on trading and management
- All disclosures must be made to the public
Public Company Operations and Shareholder Interests
After going public, the company must answer to those who hold shares of its stock. Certain processes and steps must be presented to all shareholders for a vote, such as making amendments to agreements or changing the corporate structure. The amount of investment made by each shareholder can impact their voting power because shareholders have the opportunity to either sell shares at prices below their value or bid the company up to a higher valuation.
Public Company Reporting and Disclosure Requirements
Some of the most stringent requirements for reporting come from the U.S. Securities and Exchange Commission (SEC). Examples of reporting requirements include:
- Annual 10-K reports, which discuss the company's state
- Financial statements, which are disclosed to the public
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