You hear it all the time in the news: "ABC Company Goes Public." But what exactly does it mean? By opening its shares to the public, going public completely changes how a company operates.
Companies start as private companies, receiving investments from individuals and venture capitalists. Private companies can keep their financial situation private, so the public and company employees only know what owners disclose.
When a company is public, any person can buy a share of that company on a public stock exchange. Thus, the Securities and Exchange Commission requires public companies to disclose financial information through a public quarterly and yearly SEC filing.
A company goes public when an investment bank approves the company for an initial public offering. The investment bank, or underwriter, becomes legally responsible for the shares and sells them to the public.
To qualify for an IPO, private companies must have high growth prospects and innovative product(s) and/or service(s); meet revenue, profit and financial audit requirements; and be competitive in their industry.
Advantages of Going Public
Going public strengthens a company's capital base, makes acquisitions easier, increases access to debt markets and diversifies ownership.
Disadvantages of Going Public
Disadvantages include increased pressure on short-term growth, increased costs, increased restrictions on management and trading, disclosure of financial information and original company owners' loss of control in decision making.