What Does Going Public Mean?

Going public is like renting out a spare room in your house…

By inviting a new couple to come into your home and live there, you’re opening yourself up to a new source of income. But you’ll now have to lose some privacy. Going public works kind of the same way. By selling shares of stock externally, a company can raise extra cash to fund new projects. But after going public, the company will have new filing responsibilities with the SEC and a larger group of owners to whom they are accountable.

Going public is when a privately owned corporation transitions to become a publicly owned company. A company goes public by floating company stock shares on a stock market or over-the-counter so that members of the general public can buy those shares.

Stock shares represent company equity, which means that every shareholder effectively owns part of that company. That’s why a company whose shares are publicly traded is referred to as a public company.

A company goes public by holding an Initial Public Offering (IPO). An IPO is the process in which a private company registers with the U.S. Securities and Exchange Commission (SEC) to sell stock to members of the public. Registration with the SEC also means the company needs to file regular and publicly accessible disclosures about its financial performance.

In addition to registering with the SEC, most companies hire an underwriter to manage their IPO. Underwriters are normally banks or specialist finance companies. They help companies decide how many shares to issue, the price they should be trading for, and where the company will sell them.

Each company usually has different motivations that drive the IPO process. But generally speaking, most companies go public because they want to raise cash. Going public can also mean a significant payday for company owners or employees that have an equity stake in the company if they sell those shares.

When companies go public, they’re able to tap into financial markets to generate funds for the business by selling shares of company stock. Because those shares represent equity in the company, a company is technically selling chunks of itself to outside investors.

The income generated through trading securities often allows a company to invest in big projects and expand operations.

In addition to raising money for a business, sometimes venture capitalists take a company public as an exit strategy to divest of a company (sell off their ownership). This is often done by investors who are willing to offer seed funding and grow a business, but are less interested in staying on to help private company managers in the day-to-day running of that business. Staging an IPO enables a venture capitalist to trade their company shares on a public market.

To take a company public, company owners must stage an Initial Public Offering (IPO). An IPO is when a company floats a proportion of its stock ownership over-the-counter or through a stock exchange so that shares are made available to members of the general public.

The SEC regulates the IPO process, and companies that want to go public will need to register with the SEC before they can sell securities to the public. Submitting SEC Form S-1 normally completes registration, but some companies need to fill out extra regional declarations.

To register with the SEC as a public company, you’ll also have to include a company prospectus. A company prospectus is the document you plan on using to market your company as an investment option to prospective shareholders. After the SEC reviews a disclosure and declares its registration statement effective, that means the company can prepare to start trading securities. SEC registration not only allows a company to sell stock shares, but it also binds that company to a number of new regulatory reporting requirements. By going public, a company agrees to send disclosures to the SEC and shareholders. Those disclosures include filings like annual reports, quarterly reports, changes in leadership, dividends, bankruptcy proceedings, proposed mergers, and more.

As part of the IPO process, a company will normally hire an underwriter to help manage the IPO process. An underwriter is a bank or financial specialist that can value a company and decide what percentage of stock shares should be issued for public sale. An underwriter will also help a company decide what price those shares should open at, and where they’ll be made available for purchase. This information helps a company to produce its prospectus, complete registration with the SEC, and move forward to execute its IPO by floating shares.

Some underwriters will offer shares to its clients as part of an IPO. But a company may choose to trade shares through over-the-counter markets or list the company on a public stock exchange.

Companies of all shapes and sizes are able to register with the SEC to sell company stock to members of the public. But going public does include a number of risks. That’s why most underwriters will have a list of requirements a company has to meet before the IPO process kicks off.

Traditionally, companies need to demonstrate consistent and predictable revenue. Investors generally want to put their money in companies they know deliver reliable results and meet earnings targets. A company typically will need to have matured over a number of years so that it has enough historical data to prove to underwriters and new investors that it’s consistent.

That being said, for tech or biotech companies looking to go public, underwriters often look at revenue potential rather than actual earnings. That’s why younger companies with less historical data tend to rely on projected earnings and market potential rather than actual revenues.

In addition to reliability, a company should also be able to demonstrate growth potential. Market demand is generally likely to be lower for stock shares in companies that don’t show any long-term growth. After all, companies that don’t grow are going to struggle to increase revenues. Before a company goes public, its managers need to be ready to make a case for future growth and expansion.

Underwriters will also often need a company to have a relatively low debt-to-equity ratio before going public. A debt-to-equity ratio tells underwriters how much leverage a company is using by dividing a company’s total liabilities by shareholder equity. The resulting ratio then shows a company’s ability to pay back company debts with existing shareholder equity if the company isn’t doing well.

Finally, a company needs to have enough extra cash to finance the IPO process. To go public, companies will typically need to hire lawyers, underwriters, and accountants; pay for SEC registration and public listing fees with markets or exchanges, and more. That normally results in accrued listing costs that can represent up to 7% of the company’s total market value.

Generally speaking, a company can go public when it meets underwriter requirements around some level of income consistency, company maturity, and growth potential.

But strategy will largely drive a company’s decision on when to go public. If a company has big plans for development and expansion, is performing well, and is willing to accept the risks associated with going public, it may be time to consider going public.

Going public typically doesn’t affect the existing day-to-day operations of a company. That means many employees are left relatively untouched by the implications of an IPO. But when employees own stock options in the company they work for, going public does impact the value of their holdings.

A lot of employers offer the option to buy stock in a company as a reward for service. But when a company goes public, employees and private investors don’t usually have the ability to sell their shares for a certain period of time. This typically lasts for around 180 days, and it’s called an underwriter’s lockup.

An underwriter’s lockup prevents existing shareholders from selling their shares right after an IPO. This measure is taken to prevent the possibility of too many employees unloading their shares and flooding the market with company stock. That would depress a stock’s price and be a red flag to potential investors. But just because a company is going public doesn’t necessarily mean employees will rush to sell their stake. Lockups are only a preventative measure.

After the dust has cleared and a liquid market has been set up, employees can start trading their company shares.

Going public can offer companies a range of advantages and disadvantages.

A big advantage of going public is that it enables a company to get easier access to financial markets. By going public, companies are able to sell stocks to a wider range of potential investors. That helps companies tap into a new source of revenue and raise capital to fund business operations.

The top disadvantages of a company going public are more shareholders and new regulatory responsibilities and public scrutiny. Companies that go public have to register with the SEC and then carry out a number of regular disclosures around company changes and financial performance.

Public companies aren't only answerable to the SEC, but also to a larger group of company owners. When shareholders need to vote on changes, this can make it more difficult to get them approved.