Definition
Going public refers to the process in which a private company becomes a publicly traded company by issuing shares, thus becoming subject to the regulations of a public company. It’s often achieved through an initial public offering (IPO), where shares are sold to institutional and individual investors. This move usually aims at raising capital for growth or to pay off debts.
Key Takeaways
- Going Public refers to the process in which a privately held company offers its shares to the public for the first time through an Initial Public Offering (IPO). It’s a significant transition that signals the company’s readiness to expand and provide opportunities for the public to invest in the firm.
- When a company goes public, it becomes subject to the regulations of the Securities and Exchange Commission (SEC) and is required to disclose financial and business information on a regular basis. This leads to increased transparency and accountability, but also significantly increases administrative duties and regulations.
- Though Going Public can generate substantial capital that can be used for research, development, expansion, and paying off debts, it may also lead to dilution of control, risk of takeover, and the pressure of quarterly earnings reports. Hence, decision to go public must be weighed carefully to balance potential benefits and drawbacks.
Importance
Going Public is a crucial term in finance as it refers to a private company’s initial public offering (IPO), thereby becoming a publicly-traded and owned entity.
This process is vital because it allows a company to raise substantial capital from a wider range of investors.
This capital can then be used to fuel expansion, reduce debt, or invest in new projects or technologies, facilitating its growth and competitive advantage.
Moreover, going public increases a company’s visibility, credibility, and valuation, making it easier for it to leverage additional financing options in the future.
However, it also comes with an increased focus on shareholder value, a need for heightened transparency, and regulatory compliance.
Explanation
Going public is a significant strategy used by businesses for several key reasons, primarily to raise capital for expansion, research, debt reduction, or to facilitate acquisitions. Some of the other advantages of going public include increased public awareness of the company, liquidity for its stocks, and Prestige or increased credibility in the markets. By selling shares to the general public, a company can raise a considerable amount of funds, which can be a critical tool for its growth plans.
It is also a way for the company’s original investors, and sometimes its employees, to cash in parts of their stake. However, going public is not just about generating funds. It can be beneficial to a company in other ways, too.
Going public increases a company’s visibility in the market and helps in creating a public image, helping grow its customer base. This increased visibility also brings with it added credibility and prestige, many times attracting additional talented employees or enhanced relationships with suppliers. Moreover, the liquidity of the publicly-traded stocks allows owners and employees to sell their shares more easily or use them as collateral, which might not be the case in a private company.
Even though it carries increased regulatory scrutiny and more complex reporting requirements, the benefits of going public still make it an attractive strategy for many companies.
Examples of Going Public
Facebook Inc: Facebook went public on May 18,The social networking giant raised $16 billion in one of the biggest tech Initial Public Offerings (IPO) of all time. The company offered 421,233,615 shares of its common stock.
Alibaba Group Holding Limited: The Chinese multinational conglomerate specializing in e-commerce, retail, internet, and technology, went public in the U.S. in SeptemberThe company raised $25 billion in its initial public offering on the New York Stock Exchange (NYSE), marking the largest IPO in the history of the NYSE at the time.
Uber Technologies Inc: Uber, the American ride-hailing service, entered the stock market with its IPO on May 10,Despite its highly-anticipated IPO and being one of the biggest tech companies to go public, the company faced a disappointing opening with stock prices falling on the first day of trading.
Frequently Asked Questions about Going Public
What does ‘Going Public’ mean?
Going public refers to a private company’s first sale of stock to the public. It is typically done through an initial public offering (IPO). With this process, the private company transforms into a public company that is owned and traded by the general public.
What are the advantages of going public?
The main advantage for a company going public is the ability to raise capital quickly by attracting a large number of investors. It increases the company’s visibility, credibility, and financial standing, making it easier to attract top talent, do mergers and acquisitions, and withstand economic downturns.
What are the downsides of going public?
When a company goes public, it must adhere to the regulatory rules and reporting requirements of the Securities Exchange Commission, which can be costly and time-consuming. It also means sharing a portion of the company’s profits with the public investors in the form of dividends. Additionally, the company may have to make decisions based on shareholders’ short-term interests rather than long-term goals.
What happens during an IPO?
In an IPO, the shares of a company are sold to institutional investors and usually also, to retail investors. A large amount of capital is raised through this process, and the company gets listed on a stock exchange where the shares are freely traded.
Who can buy shares in a company going public?
Initially, shares are purchased by institutional investors such as mutual funds and pension funds. After the IPO, shares are available for trading on a public exchange where any investor can buy them.
Related Entrepreneurship Terms
- Initial Public Offering (IPO)
- Securities and Exchange Commission (SEC)
- Underwriter
- Investment Bank
- Stock Exchange
Sources for More Information
- Investopedia:This comprehensive finance-oriented website provides information on myriad topics, which include ‘Going Public’.
- Entrepreneur: An online platform tailored for those interested in businesses and startups. Their material includes invaluable content on the process of ‘Going Public’.
- U.S. Securities and Exchange Commission (SEC): The SEC stands as an authoritative source on the topic, responsible for overseeing the process of ‘Going Public’ in real-world scenarios.
- NASDAQ: Serving as another outstanding source of financial information, NASDAQ offers key insights into the process and implications of ‘Going Public’.
