What Does “Going Public” Mean for Companies & Why Do They Go Public?

Going public means an initial public offering (IPO) to raise capital by registering and allocating shares to public stockholders. Other going public methods are direct listing of shares sold by existing shareholders or a merger with a public shell or “blank check” special purpose acquisition company (SPAC), or spinoff. Public shares trade through a stock exchange or over-the-counter (OTC) market. 

A company wants to go public as an exit vehicle to raise capital for funding growth internally and with future M&A transactions. The share price valuation of public companies with more liquidity is usually higher than for private companies. An IPO rewards the founders and early shareholders, including employees, venture capital or private equity firms, and angel investors.

Venture capital firms can exit a portfolio company position in a VC fund through an IPO and subsequent public market stock sales after a lock-up period expires. The venture capital firm diversifies and reinvests the proceeds into new portfolio companies with high expected growth rates, hoping to achieve attractive investment returns. 

The IPO process for going public includes corporate preparation and team selection, legal and accounting audits, selecting a lead underwriter, performing due diligence, filing a registration statement with the SEC, applying to list on a stock exchange like Nasdaq or NYSE, holding road shows, setting IPO price, issuance and allocation of shares, and stabilization of stock market prices.

Road shows are repeated pre-IPO presentations, by the company’s top management team and its underwriters, to institutional investors, brokerage firms, and money managers, generally held over two weeks. These brokerage firms may be interested in buying a maximum number of IPO shares at an acceptable price when the company goes public. 

The public company is subject to applicable SEC financial statement issuance, reporting, and disclosures through required deadlines using standard forms. These filed SEC forms are accessible to the public through The Securities and Exchange Commission’s EDGAR database of company filings. 

An IPO carve-out is a reorganization process where a parent corporation separates a minority stake in a subsidiary and sells shares to new investors for the first time through an IPO of securities listed through a stock exchange, with investment banker underwriting. A carve-out may be called a partial spin-off. 

A direct listing to go public is used to list shares sold by existing shareholders in the public capital markets instead of an IPO for issuing new shares. In a direct listing, no underwriter is used. The company doesn’t raise capital; proceeds of the share offering from the direct listing go to the selling shareholders. 

The company files an S-1 registration statement with the SEC for the direct listing share offering of the previously owned shares. Company shares are listed on a public stock exchange like Nasdaq or NYSE. Existing shareholders aren’t subject to a lock-up period that would exclude them from selling shares for up to 180 days (six months). 

Operating companies can merge with an inactive and empty public shell company to go public without an initial public offering (IPO). The shares will trade either as a listing on a stock exchange or through an over-the-counter(OTC) quotation system like a bulletin board. 

SPACs (special purpose acquisition companies) use the capital raised in an IPO to acquire and merge with operating companies as investments. Companies acquired by a publicly held  SPAC become public companies with their own capital markets listing. These operating companies don’t need to complete a separate initial public offering. 

A public parent company may choose to spin off a subsidiary or business unit, so it trades separately from the parent company on a stock exchange. The transaction occurs through a stock dividend from the parent company to its shareholders without requiring an IPO of the newly public company. A spin-off is different than a carve-out. 

The SEC is the U.S. Securities and Exchange Commission, a government regulatory body with which shares in a securities offering are registered using a registration statement (like Form S-1), including a prospectus, to go public and in subsequent sales of securities to raise capital. 

According to the SEC, “a  prospectus is the disclosure document describing the offering, the securities, and the company to prospective investors.”

The SEC issues regulations, enforces securities laws, reviews and comments on registration statements and disclosures before they’re effective, and reviews financial reporting by existing public companies through the Division of Corporate Finance. 

A company should go public during a strong IPO market when buyers in the public capital markets are receptive to newly issued IPO shares. Economic environments like growth or recession, stock index highs and lows, and available supply of new stocks dictate when it’s a good time for an initial public offering or another method for going public. 

Alternative exit vehicles besides going public include merger & acquisition (M&A) sales to a strategic buyer or a private equity firm. Leveraged buyouts, including management buyouts, require predictable company cash flows to service debt loads used to finance the transactions.