How does a company become a public company?
A company becomes a public company through a process known as an Initial Public Offering (IPO). If the IPO is successful the company will list on an exchange and will become a public company. Generally speaking, a company can either be private or public. What’s the difference? Most companies are considered private when they are first formed. In this case the company’s shares or stock are held only among the founders and the initial investors. These persons are not required to submit financials to the regulatory authorities. Unlike a public company, a private company may or may not disclose details about their operation and financials to the investing public. The company is called a private company for exactly this reason; they can keep their business private.
A Public Company goes through the IPO Process
When the owners and managers decide to go public they have to prepare a document called a Prospectus. The prospectus has to be submitted to the Securities Regulatory Authority in the country that the company plans to list. But that’s not all, a copy of the document is also submitted to the Stock Exchange for the general public to peruse. Before the company can become a public company it must seek out the services of an accounting firm, or an Auditor as well as seek legal advice.
The accounting firm/auditor will prepare proper financial statements on the historic performance of the company in the case where the company has been operating for some time. If the company is a newly formed entity or a start-up, the accounting firm will prepare projections of future earnings.
Lawyers will ensure that the directors of the company and the prospective shareholders are protected. More importantly, they will have to ensure that the regulatory requirements are met. The company might also put together a board of advisors and elect a mentor.
Finally, the company will select its Lead Broker. The lead broker essentially serves as an intermediary between the company seeking to go public and the investors looking to buy shares (the investing public). The lead broker will also seek some amount of buy in from the investing public and market the new offer. They will also play a significant part in the due diligence process and propose an invitation price.
When the company list on the stock market, it is officially a public company and the shares can now be traded between investors.
Test your knowledge
Consider these four companies. Company A is a Virtual Reality Start-Up in Kingston, the company has three Co-Founders who together own all the shares. Company B is a manufacturer of hand crafted jewelry. Company B must report all its earnings to the Financial Services Commission. Company C is a restaurant chain with 250 outlets and 100 shareholders. Company D is a commercial bank that is listed on the Jamaica Stock Exchange and the Toronto Stock Exchange. Which of the these companies are public companies?
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