Public company definition

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What is a Public Company?

A public company is a business that has issued securities through either an initial public offering or following a reverse acquisition of a public shell. In addition, those securities must be trading on either the over-the-counter market or a stock exchange. A public company must also comply with the reporting requirements of the relevant governing body, which in the United States is the Securities and Exchange Commission (SEC). The SEC requires the filing of the annual Form 10-K report, as well as quarterly Form 10-Q reports, and numerous lesser reports on the Form 8-K.

The key defining characteristic of a public company is that any investor can buy or sell its securities. This is not the case with a privately-held entity, where the securities are not registered for public trading. This means that the price of a public company's securities can be bid up or down by investors, based on the demand for its shares. The most recent price at which its shares trade determines the total market value of the company.

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Advantages of a Public Company

There are several advantages to being a public company, which are as follows:

  • Access to capital. Public companies can raise substantial funds by issuing shares to investors. This capital can be used for expansion, research and development, acquisitions, and reducing debt.

  • Increased liquidity. Shares of a public company are traded on stock exchanges, providing liquidity to shareholders. This liquidity makes it easier for investors to buy and sell shares.

  • Enhanced credibility and public awareness. Being publicly listed can enhance a company’s reputation and credibility with customers, suppliers, and financial institutions. The increased visibility can also attract new business opportunities and partnerships.

  • Ability to attract and retain talent. Public companies can offer stock options and shares as part of compensation packages, making them more attractive to talented employees and executives.

  • Facilitates mergers and acquisitions. Public companies can use their shares as a form of currency to acquire other businesses. This can simplify the acquisition process and reduce the need for cash.

  • Opportunity for founder and early investor exit. Going public allows founders and early investors to sell some or all of their shares, providing a way to realize the value of their investments.

  • Improved financial flexibility. Public companies often find it easier to secure loans and credit due to their transparency, regulated disclosures, and perceived stability.

Disadvantages of a Public Company

The regulatory costs of staying public are burdensome. These costs include maintaining a comprehensive system of controls, having an annual audit done by outside auditors (as well as quarterly reviews) and employing securities attorneys to inspect all filings before they are released.