Alternate definition: A company that regularly shares with the public certain business and financial information.
How Does a Public Company Work?
Companies that go public typically move through a series of regulatory steps the SEC requires.
How Companies Go Public
Companies go public through an initial public offering, more commonly known as an “IPO.” An IPO is the first time a company issues public securities. To issue an IPO, a company typically must file Form S-1 with the SEC, which is where it registers the securities it plans to sell. When companies go public, most hire a team of underwriters that agrees to purchase the initial shares and then sell them to investors. Because only select brokers serve as underwriters for any given IPO, many investors may not have access to IPO shares.
Requirements for Public Companies
Public companies are subject to significant filing requirements with the SEC. These filings help create transparency and serve as a form of protection for investors. Here are some of the filing requirements that public companies have to satisfy:
Initial registration statement: When companies first go public, they file an initial registration statement (Form S-1) to provide important information about the company and its securities. Annual financial statements: Companies must file annual audited financial statements (10-K) that disclose important information about the company’s performance and financial situation. Quarterly reports: Companies must also file unaudited financial statements (10-Q) for the first three quarters of their fiscal year, comparing their performance to the same quarter the previous year. Proxy statements: Proxy statements let investors know about upcoming shareholder votes, including board-of-directors elections, executive compensation decisions, and proposed mergers. Other events: Companies must file additional disclosures about any other major events that affect the company and that shareholders should know about. Examples could include bankruptcies, tender offers, secondary securities offerings, corporate leadership changes, and preliminary earnings announcements.
Why Companies Go Public
A main reason that companies go public is to raise capital. A public company can sell securities in a public market and use the capital raised from those securities to expand their operations. Going public is an alternative to raising capital through debt financing or private equity. Going public can also help boost a company’s public image. Public companies often have increased name recognition, some of which comes from public attention during the IPO process. Not only does this name recognition help to build the brand, but it also helps attract talented employees.
Public Company vs. Private Company
Many private businesses are individually or family-owned. However, there are plenty of larger firms that choose to remain private. Those companies are often owned by a small group of investors obtained through private equity and venture capital deals. Because private companies don’t sell securities in a public market, they aren’t required to register with the SEC and don’t have to file financial statements or other disclosure statements.
Pros and Cons of Being a Public Company
Pros Explained
More access to capital: When companies are public, they have more options for raising capital because they can issue public shares. And even after their IPO, they can issue follow-on offerings to raise additional capital when needed. Increased market value: Public companies often have higher market values than their private counterparts. This isn’t just good for those that buy shares on the public market, but also for internal shareholders like founders and executives. Enhanced public image: Public companies often get more public exposure than private ones. They may have a better opportunity to become household names, which can help them continue to grow. This enhanced public image also helps them attract and retain management and employees.
Cons Explained
Loss of control: Public companies are accountable to shareholders, meaning founders don’t have total control. The shareholders elect the board of directors, who have decision-making powers. However, some founders of public companies maintain the majority of shares to ensure they still have majority control.Required registration and disclosure: Public companies are required to register their shares with the SEC. They must also file financial statements, as well as other disclosures. As a result, public companies have less privacy.Additional expenses: Public companies have many additional expenses. Going public means paying underwriting fees, legal and accounting expenses, SEC filing fees, and other expenditures. Once companies are public, they still have additional ongoing costs such as additional employees, legal and accounting fees, and more.
What It Means for Individual Investors
Because public companies can sell securities in a public market, individuals have the opportunity to invest in those companies, effectively becoming partial owners.
There are many great reasons to invest in companies you believe in, including the ability to experience a capital gain when the stock price increases, the potential to earn dividends, and the ability to participate in shareholder votes. Before investing in a public company, do your research. The documents public companies file with the SEC can tell you important information about a company and its performance. Once you’re ready to invest in a public company, you can do so through a direct stock plan, a dividend reinvestment plan, a brokerage firm, or indirectly through a mutual fund or exchange-traded fund (ETF).
