What Does It Mean When A Company Goes Public?
How does it work?
What are the essential elements you should know!
In this article, I will break down the question what does it mean for a company to go public so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let’s see what does going public mean and how does it work!
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What Does It Mean When A Company Goes Public
When a company “goes public”, it means that the company is going through a process to get listed in the stock market and sell shares to the general public.
When a private company gets listed in the stock exchange for the first time and its shares start trading, we call that the “initial public offering”.
A company that is undergoing a process to get listed in a stock exchange is a company that is “going public”.
When a new company is incorporated, typically the company starts its life as a private company.
Not all companies can or choose to go public.
However, a small percentage of private companies eventually reach a point in their growth stage where going public becomes the best strategy for various reasons.
As a result, a private company that eventually gets listed on an exchange selling shares to the general public is a company that has gone public.
To better understand the notion of what it means for a private company to go public, it’s worth understanding the following:
- What is a private company
- What is the initial public offering
- What is a publicly traded company
A company that is incorporated is generally considered a “private company” as its shares are privately owned by one or a few shareholders (the founders, investors, or business partners, or others close to the business, for example).
According to Investopedia, a private company is defined as follows:
A private company is a firm held under private ownership. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (IPO).
In essence, a private corporation is a company where its shares are closely held by specific individuals or shareholders that are closely related to the business or are not considered legally to be members of the “public” based on the applicable securities laws.
Initial Public Offering
One of the main reasons driving companies and corporations to go public is that they are able to raise the necessary capital they need to fund their business operations.
Through the initial public offering, a private company is able to start selling shares to the public who can choose to invest hoping that the company will grow over time and the shares appreciate in value.
Typically, for the company’s shares to be traded publicly, the shareholders will need to accept a dilution in their stock ownership and the introduction of new shareholders in the business.
According to the Corporate Finance Institute, an initial public offering or IPO is defined as:
An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public.
A company going through an IPO process is a company “going public”.
Publicly Traded Company
What does it mean to be a publicly traded company?
A publicly traded company is a “public company” where its shares are bought and sold on an exchange such as the New York Stock Exchange, the NASDAQ or another exchange.
For a company to be authorized to sell shares to the public, it must satisfy strict regulatory requirements intended to protect the public and the market.
According to The Motley Fool, a publicly traded company is defined as:
One that issues shares that are publicly traded, meaning the shares are available for anyone to buy on the open market and can be sold
In other words, anyone can buy or sell shares in a publicly traded corporation.
In the United States, public companies are required to comply with many rules and regulations as required by the Securities and Exchange Commission, must have a board of directors, and make various public disclosures.
Why Do Companies Go Public
There are many reasons why a company goes public.
For some entrepreneurs, it’s the realization of a dream to have a company they founded go public.
For others, it’s a means to access the capital needed to further expand business operations and scale.
In other instances, you may have company investors (live venture capitalists or angel investors) that want to cash out and realize the profit on their investment.
No matter the reason, when a company goes public, it begins a new chapter in its life cycle.
Let’s look at some of the advantages and disadvantages of going public.
The primary objective for going public is to raise capital by issuing equity securities.
The advantage of issuing equity securities is that the company will not have to reimburse the investors for the investment made in the company.
On the other hand, the investors become part owners of the company and a shareholder or group of shareholders with a lot of shares (and votes) can influence the company, take on seats on the board, and weigh in on strategic decisions of the company.
Aside from the need to raise capital, here are some other reasons why a company may want to go public:
- Acquire a level of prestige allowing it to win larger contracts
- Get a lot of free press and publicity
- Secure better lending conditions with their banks and creditors
- Fund research and development
- Pay off excess debt
- Raise capital at a cost lower than through traditional financing methods (like bank loans)
Going public comes with a lot of benefits but company management and shareholders should also be aware of the drawbacks of being a public entity.
In summary, here are some of the drawbacks that public entities deal with on a regular:
- Company shareholders have more power to influence the management of the company
- The management team must continually meet market expectations impacting the stock price
- The IPO process is quite expensive and will drain cash away from the business during the process
- The company must report its financial information to the public
- An investor or group of shareholders can invest in the company with the objective of taking control of the board and implementing their management team
- The company must adopt a lot of processes, controls, and certifications that may be costly
The benefits of taking a company public may certainly outweigh the drawbacks but it’s important to know what happens when a private company goes public so you are ready.
How To List A Company On The Stock Exchange
How does a company go public?
There are different paths a company can take to go public, namely:
- IPO process
- Direct listing
- Reverse merger
Let’s look at each more closely.
Initial Public Offering Process
To go public, a private company must go through a listing process where it must satisfy various rules, regulations, and requirements.
Companies start the process by contacting an investment banking firm that will help the company in the listing process.
Many important decisions must be made, such as:
- How many shares does the company want to sell to the public
- What will be the initial stock price
- What are the regulatory hurdles to overcome
For a company to be eligible to go public, it must meet many requirements.
As an example, here are some elements that must be satisfied for a company intending to go public:
- Must have a consistent revenue
- The company has enough funds to pay for the listing process
- The company should have growth potential
- A company must have a strong management team with experience
- The company must have strong business processes
- The company should not have high levels of debt
- The company has a solid long-term growth plan
- The company must meet the Securities and Exchange Commission requirements
Once the company meets all the legal and financial requirements to go public, it can then complete the IPO process by listing its shares.
Quite often, the investment banking firms will underwrite the shares and take on the legal responsibility for those shares hoping to sell them more than what they paid for.
Direct Listing Process
The direct listing process is a process where a company can directly get listed without having to work with an investment banker or underwriter.
This is a relatively new process that has been used by companies like Spotify, Slack and Coinbase.
This process of direct listing remains controversial.
The critics see the direct listing process as a type of listing path that elevates the risk to investors and the general public (which can ultimately hurt investor confidence in the stock exchange).
The argument is that by working with an underwriter, companies are able to go through a further level of due diligence that can benefit the public investors.
Reverse Merger Process
A reverse merger is another way that a company can achieve a “public” status.
The way it works is that a private company will merge with an already publicly traded corporation.
Alternatively, a publicly-traded company can acquire a privately held corporation turning it into a public corporation.
Typically, in the context of a reverse merger, the public company is either a shell company or a SPAC (special purpose acquisition company) transacting with the private corporation.
In essence, the way it works is that the shell company goes public and uses the IPO proceeds it gets to acquire the private corporation.
Then, the private company management team takes over the public company reigns and operates the business as a publicly listed corporation.
The reason why reverse mergers are gaining in popularity is that it allows a private company to go public more affordably and in a more expedited fashion.
What Does It Mean For A Company To Go Public Takeaways
So there you have it folks!
What does it mean to go public?
What happens when a company goes public?
From a technical point of view, a company can go public either by selling its shares to the market or making certain public disclosures about its business and financial position.
So what does it mean when a private company goes public?
In a practical sense, it means that the company has sold shares to the public by listing itself in a stock exchange through a process called an IPO (initial public offering).
For many entrepreneurs, going public is their ultimate dream where they can see their company trade with other prestigious companies and potentially get a large payout.
When a company goes public, its previously privately held shares will no longer be considered “private” but become publicly held.
For startups and companies with significant growth potential, the process of going public allows them to tap into a major source of funding allowing them to scale and continue to grow (the examples are Google, Facebook, and other promising companies that have gone public).
When a private company goes public, it will then need to regularly comply with the securities law requirements, such as:
- File quarterly reports
- File audited annual reports
- Disclose important events to the public
- Provide shareholders with a proxy to vote
- Disclose executive or board member stock transactions
In the end, what happens when a private company goes public, it is able to sell its shares to the general public and raise capital as may be needed to fund its business.
I hope that I was able to answer your questions such as what is going public, what publicly traded company mean, or what is involved in going public?
It simply means having your company shares trade on a stock exchange!
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What Does It Mean When A Company Goes Public
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