What is a public company?
A public company is a business whose shares can be freely traded on a stock exchange or over-the-counter. Also known as a publicly traded company, publicly held company, or public corporation. The stocks of this type of company belong to members of the general public, as well as pension funds, and other large investing organizations.
A public company contrasts with a private company, which is not listed on a stock exchange and whose shares are only traded/exchanged via a private arrangement with the stockholders.
In most cases, the stocks of a public company belong to many investors, while those of a private company are in the hands of comparatively few shareholders.
The value of a public company is determined through daily trading.
Public companies more open than private companies
While enjoying the benefits of being able to raise considerable amounts of money in public capital markets, public companies are subject to much higher levels of reporting, regulations and public scrutiny than private companies.
They must publish annual reports, such as the Form 10-K that has to be filed with the SEC in the US. They have to make public details about their finances and business activities.
Some large companies prefer to stay as private firms because because they do not want to disclose proprietary information which could help rivals.
In public companies, the directors need to get shareholders' approval for any significant change in strategy or operations.
The US Securities and Exchange Commission (SEC) says that any company in the United States with over 500 shareholders and more than $10 million in assets must register with the SEC and adhere to its reporting standards and regulations.
How to become a public company
For a company to become public it launches an IPO (initial public offering) – on the day of the IPO it converts from a private into a public company.
Businesses generally use IPOs as a means of raising money. Sometimes the directors may decide to go public so that the workers, owners and early investors can cash in their shares.
The money that members of the public spend buying shares during an IPO does not have to be paid back. Those investors effectively become the owners of the business.
Advantages of Public Companies
Public companies have certain advantages over private companies. Namely, public companies have access to the financial markets and can raise money for expansion and other projects by selling stock or bonds. A stock is a security that represents the ownership of a fraction of a corporation.
Selling stocks allows the founders or upper management of a company to liquidate some of their equity in the company. A corporate bond is a type of loan issued by a company in order for it to raise capital. An investor who purchases a corporate bond is effectively lending money to the corporation in return for a series of interest payments. In some cases, these bonds may also actively trade on the secondary market.
For a company to transition to being publicly traded, it must have achieved a certain level of operational and financial size and success. So, there is some clout attached to being a publicly traded company having your stocks trade on a major market like the New York Stock Exchange.
Disadvantages of Public Companies
However, the ability to access the public capital markets also comes with increased regulatory scrutiny, administrative and financial reporting obligations, and corporate governance bylaws to which public companies must comply. It also results in less control for the majority owners and founders of the corporation. In addition, there are substantial costs to conducting an IPO (not to mention the ongoing legal, accounting, and marketing costs of maintaining a public company).
Public companies must meet mandatory reporting standards regulated by government entities, and they must file reports with the SEC on an ongoing basis. The SEC sets stringent reporting requirements for public companies. These requirements include the public disclosure of financial statements and an annual financial report—called a Form 10-K—that gives a comprehensive summary of a company's financial performance.
Companies must also file quarterly financial reports—called Form 10-Q—and current reports on Form 8-K to report when certain events occur, such as the election of new directors or the completion of an acquisition.
These reporting requirements were established by the Sarbanes-Oxley Act, a set of reforms intended to prevent fraudulent reporting.5 Additionally, qualified shareholders are entitled to specific documents and notifications about the corporation's business activities.
Finally, once a company is public, it must answer to its shareholders. Shareholders elect a board of directors who oversee the company's operations on their behalf. Furthermore, certain activities—such as mergers and acquisitions and certain corporate structure changes and amendments—must be brought up for shareholder approval. This effectively means that shareholders can control many of the company's decisions.
Transitioning From a Public Company to a Private Company
There may be some situations where a public company no longer wishes to operate within the business model required of a public company. There are many reasons why a public company may decide to go private. A company may decide that it does not want to have to comply with the costly and time-consuming regulatory requirements of a public company, or a company may want to free up its resources to devote to research and development (R&D), capital expenditures, and the funding of pension plans for its employees.
When a company transitions to private, a “take-private” transaction is necessary. In a “take-private” transaction, a private equity firm, or a consortium of private equity firms, either purchase or acquires all of the outstanding stock of the publicly-listed company. Sometimes this requires the private equity firm to secure additional financing from an investment bank or another type of lender that can provide enough loans to help finance the deal.
Once the purchase of all the outstanding shares is complete, the company will be delisted from its associated stock exchanges and return to private operations.