Path Towards Public

In a back-to-basics Daily Stack, we review the complexities of going public or in other words, becoming a publicly-traded and owned entity, and why companies still do it. 

Photo by Patrick Weissenberger

• Why Go Public? Businesses go public for a number of reasons. Most hope to expand their business by raising more capital through selling stock options to public investors, increase the valuation of the company as public companies are more highly valued than private ones, increase the public awareness of the brand, and/or use the additional ‘currency’ through its stock options for mergers and acquisitions. Venture capitalists also push for companies to go public in order to generate a return through a potential public listing as their exit strategy. 
• Ways to go public. The most often covered way of going public in the news is via IPO where new shares are created, underwritten, and sold to the public. However, there have been other ways that are considered less troublesome such as merging with a SPAC, or through a direct listing where no new shares are created and existing outstanding shares are sold. 
• A lengthy costly process. The traditional IPO method is an essay of requirements and usually requires years of filing preparation especially around properly audited financials, as well as adequate funding for the IPO process which is often lengthy and expensive. The JOBS Act which was enacted in April 2012, and the FAST Act which was enacted in December 2015 both seek to help private companies IPO, and if companies meet the criteria, they are permitted to follow less stringent financial reporting rules. 
• 2020 Rush. Despite hurdles, going public is a goal for many companies. Even with a pandemic, there have been 405 IPOs on the U.S. stock market in 2020 and there are notable companies rushing to IPO before the year ends. This is comparable to 233 IPOs by 2019. 
• 2019 Failures. Even after a company has successfully listed, it must continually fulfill filing obligations and undergo the scrutiny of the public. Many companies like Uber, Lyft, and Peloton had high-profile IPOs that flopped as a result of bad publicity and lack of confidence from public investors once their financial status was revealed.