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:

  • Sell securities. A public company can sell its securities to investors, so it can raise capital more easily than a privately-held entity. This can be a major issue, since a company trading on a major exchange may be able to raise billions of dollars from the investment community.

  • Acquisition funding. A public company can offer its shares to the shareholders of target companies in acquisition transactions, rather than using valuable cash for these acquisitions. This can result in an accelerated rate of growth, as compared to the rate at which private entities can acquire other businesses.

  • Owner liquidity. The owners of a public company can easily sell their shares to other investors via stock exchange transactions. This is a major advantage, since the owners of private companies may struggle to sell their shares at a reasonable valuation, if at all.

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.