A public company is a business that allows the public to own equity through shares of their corporation. These companies are a vital part of the American economy since play a large role in the retirement and savings plans of millions of Americans.
When a public company makes its shares available in public markets, the shareholders become equity owners. However, these equity owners do not run the day-to-day business operations of the company.
How Do Public Companies Work?
Public companies typically trade their stock to investors who, in turn, become shareholders in their entity. The shares of the company are traded on the open market. But, this is not the only way that a company can be considered “public.”
How Can a Public Company Be Defined?
There are two different ways that a public company can be defined. Firstly, the most well-known one is when a company trades securities on the public markets.
Secondly, is less well-known but is still classified as a public company. This is when a company chooses to disclose their business and financial information to the public regularly.
Company Trades Securities on Public Markets
Public companies that raise funds by selling stock on the public market are considered public. Before becoming public, it is often hard for private corporations to obtain large amounts of capital to finance their operations.
In private entity, the only options to gain capital are slim. They consist of getting a loan with costly interest, reinvest profits, or get investments from wealthy individuals.
Company Discloses Business and Financial Information to the Public Regularly
A public company can choose to not provide an equity option to the public in their company while still meeting the requirements for being considered “public.”
If a company meets predetermined requirements from the U.S. Securities and Exchange Commission (SEC) to report their business and financial information, they must begin SEC reporting as a public company. The triggering of such information can be from allowing their investor base to be above a specified size or by voluntarily registering with the SEC.
Public Reporting Obligations
There are three triggers that require a company to report their business and financial information publicly. Companies that have these obligations are required by the SEC to provide specified quarterly and annual reports to government entities and shareholders.
Selling Securities in Public Offerings
When most companies are founded, they start as private companies. Usually, they are small or family run, and as the company grows it has an increased need for expansion and capital.
At this point, the company can decide to seek funds from equity sources like stock or take on debt from loans. This is when a private company begins the process to go public.
“Going public” starts with an initial public offering (IPO). Under the laws of federal securities, the company cannot lawfully sell or offer shares to the public until it has been registered with the SEC. This process can take many years; it does not happen overnight.
Investor Base Reaches a Particular Size
The SEC has a 500-shareholder threshold that triggers public reporting requirements. If a company reaches 500 or more distinct shareholders, it is required to start the SEC public registration and provide financial information within 120 days after the end of the fiscal year.
Register as a Public Company Voluntarily
Some companies may see the value in sharing their information with the public, even if they do not offer shares of stock or hit the shareholder threshold.
Businesses have the option to voluntarily register as a public company with the SEC to provide the public, financial media, and analysts with a look at their business and financial status. In short, this insight could have benefits for the company in the long run.
Disclosures & Transparency
Becoming a public company is not something that is taken lightly. These companies are required to disclose their business information to the public and shareholders on a regular basis. This is done to protect shareholders with transparency and to ensure compliance of federal regulations.
The SEC has a list of annual and quarterly reports that public companies are required to file.
This form announces major events that are pertinent to shareholders. For instance, it includes reporting on changes in leadership, preliminary earning announcements, bankruptcy proceedings, and more.
A Form 10-Q is required on a quarterly basis for the first three quarters. The fourth quarter, the company is required to file a 10-K. The Form-10Q is a comprehensive form includes information relevant to the company’s financial position, including an unaudited financial statement.
This annual report is filed the fourth quarter and provides a yearly look at the business financials. It contains almost everything about the business that is relevant to the decision making of an investor on buying or selling shares of stock in the corporation.
To clarify, the Form 10-K provides a more detailed look into the company than the annual report sent to shareholders. It includes an audited financial statement, earnings per share, organizations structure, executive compensation, and other data.
Companies are required to provide their shareholders with a proxy statement on an annual basis. The proxy statement will include information that helps shareholders make informed decisions on matters that will be addressed at an annual shareholder meeting. In addition, it includes information on when and where the shareholder’s meeting is taking place.
The information provided in the proxy statement can include directors’ salaries, bonus and option plans for directors, proposals for new additions to the board of directors, and declarations by the company’s management.
A public company is required to provide shareholders with details about proposed mergers (when two or more companies become a single entity). The shareholder majority approves or denies the merger.
The company is obligated to report information about proposed mergers to their shareholders. The merger information should be detailed on one of the following forms: a proxy statement, an information statement on Schedule 14C, or a joint proxy statement on Form S-4.
Acquisitions & Tender Offers
Acquisitions and tender offers are required by the SEC to be reported to shareholders. These offers can be found on Form 8-K, which discloses developments of company events.
To summarize, in a merger multiple companies become one entity and in an acquisition one company outright purchases the other.
Tender offers are also regulated by the SEC. A tender offer is when a company or third party offers to purchase a sizable portion of the company’s securities.
To protect investors from the increasing use of tender offers, the Securities Exchange Act of 1934 added an amendment known as the Williams Act. This Act is required Schedule 13D to give investors warning of impending changes, including tender offers and beneficial ownership reports. .
There are two “beneficial ownership” reports – Schedules 13D and 13G. Within 10 days of an owner acquiring 5% or more voting shares, the reports must be filed.
Transactions by Company Insiders
There are three forms that must be filed by company insiders (directors, officers, and those that hold over 10% of any class of security of the company). They must file Forms 3, 4, and 5.
- Form 3 discloses ownership amounts and is the initial filing.
- Form 4 identifies any changes in ownership.
- Lastly, Form 5 is an annual form that provides a summary of information that should be reported.
How Does a Company Go Public?
When a company is ready to go public, it is a complicated endeavor. It starts by beginning the IPO processes. The company is required to hire an investment bank to underwrite. Using a competent and experienced investment bank will help determine the success of the IPO.
The company, investment bank, and advisors conduct due diligence to investigate the company. This assures investors that the issuer’s registration statement is accurate. The process focuses on legal, financial, tax, and operational areas to assess risk and opportunities.
The bank prepares the prospectus which includes information about the business including past, present, and expected financial performance.
After the company has satisfied all the SEC requirements of the IPO, an underwriter and the company agree on an issue date. They must then agree on an offer price before the date of issue. Typically, IPOs are underpriced to make sure that the shares offered to the public are oversubscribed or sold.
Difference Between a Private and a Public Company
Both private and public companies can offer stock options. While public companies offer them on the public market, private companies have a limited number of shares that they do not make public. Private companies include LLCs, partnerships, and corporations, but in order for a private company to become public they will need to become a corporation.
Since public companies offer securities to the public, they are required by the SEC to provide annual reporting to protect their investors. They also have their business and financial data analyzed and under public scrutiny, while private companies have anonymity.
Learning More Before Investing
Just because a company has jumped through hoops to be considered “public” does not mean that they are a good investment. You need take your time to research the company, its financial reports, and make sure it is a sound investment opportunity.
If you are unsure of where to begin, reaching out to a financial advisor might be the key you are looking for. They can unlock details about public companies that are worth the investment and steer you away from ones that are not worth the risk. Working with a financial advisor is always a sound decision.