What is a public company?
A public company, also called a publicly traded company, is a society whose shareholders are entitled to a share of the company’s assets and profits. Through the free trading of shares on stock exchanges or over-the-counter (OTC) markets, ownership of a public company is distributed among shareholders from the general public.
Many Americans invest directly in public companies, and if you have a retirement plan or own a mutual fund, it’s likely that the plan or fund owns shares in public companies.
Key points to remember
- A public company – also known as a publicly traded company – is a company whose shareholders have a right to a portion of the company’s assets and profits.
- Ownership of a public company is distributed among general public shareholders through the free trading of shares on stock exchanges or over-the-counter (OTC) markets.
- In addition to its securities traded on public exchanges, a public company is also required to regularly disclose its financial and business information to the public.
In addition to its securities traded on public exchanges, a public company is also required to regularly disclose its financial and business information to the public. If a company has public reporting requirements, it is considered a public company by the United States Securities and Exchange Commission (SEC).
Understanding a public company
Most public companies used to be private companies. Private companies are owned by their founders, their management or a group of private investors. Private companies also have no public reporting requirements. A company is required to comply with public reporting requirements once it meets one of these criteria:
- Sell securities in an initial public offering (IPO)
- Their investor base reaches a certain size
- Voluntarily register with the SEC
An IPO refers to the process by which a private company begins to offer stock to the public in a new stock issue. Prior to an IPO, a company is considered private. Starting to issue shares to the public through an IPO is very important for a company as it provides it with a source of capital to fund its growth.
In order to achieve an IPO, a company must meet certain requirements, both the regulations set by the regulators of the exchange where they hope to list their shares and those set by the SEC. A company typically hires an investment bank to market its IPO, determine the price of its stock, and set the date for its stock issuance.
When a company goes public, it typically offers its current private investors equity bonuses to reward them for their previous private investment in the company. Examples of public companies include Chevron Corporation, Google Inc. and The Proctor & Gamble Company.
The United States Securities and Exchange Commission (SEC) stipulates that any company in the United States with 2,000 or more shareholders (or 500 or more shareholders who are not accredited investors) must register with the SEC as as a public company and comply with its reporting standards and regulations. .
Advantages of public companies
Public companies have certain advantages over private companies. Namely, public companies have access to capital markets and can raise funds for expansion and other projects by selling stocks or bonds. A stock is a security that represents ownership of a fraction of a society.
Selling shares allows the founders or senior 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 to raise capital. An investor who buys a corporate bond effectively lends money to the company in return for a series of interest payments. In some cases, these bonds may also be actively traded on the secondary market.
For a company to be listed on the stock exchange, it must have reached a certain level of size and operational and financial success. So there is a certain weight attached to being a publicly traded company whose shares trade on a major market like the New York Stock Exchange.
Disadvantages of public companies
However, the ability to access public capital markets also comes with increased regulatory scrutiny, administrative and financial reporting requirements, and corporate governance statutes with which public companies must comply. It also results in less control for the majority owners and founders of the company. Additionally, there are substantial costs associated with completing 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 must file reports with the SEC on an ongoing basis. The SEC sets strict reporting requirements for public companies. These requirements include public disclosure of financial statements and an annual financial report, called a Form 10-K, which 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 certain events, such as the election of new directors or the completion of an acquisition.
These reporting requirements have been established by the Sarbanes-Oxley Acta set of reforms aimed at preventing fraudulent declarations. In addition, qualified shareholders are entitled to specific documents and notifications on the company’s business activities.
Finally, once a company is listed on the stock exchange, it must answer to its shareholders. Shareholders elect a board of directors that oversees the operations of the company on their behalf. In addition, certain activities, such as mergers and acquisitions and certain changes and modifications to corporate structure, must be subject to shareholder approval. This effectively means that shareholders can control many corporate decisions.
Changing from a public company to a private company
There may be situations where a public company no longer wishes to operate within the required business model 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), fixed assets, and the funding of its employees’ pension plans.
When a company goes private, a “privatization” transaction is necessary. In a “private equity” transaction, a private equity firm or consortium of private equity firms buys or acquires all of the outstanding shares of the publicly traded company. This sometimes requires the private equity firm to obtain additional funding from an investment bank or other type of lender who can provide enough loans to help finance the transaction.
Once the purchase of all outstanding shares is complete, the company will be delisted from its associated exchanges and revert to private operations.