A public company is traded on a stock exchange, and is owned by stockholders instead of individual people. In certain public companies, called closed corporations, only a few people hold all the stock, and in this case, the company may resemble a partnership more than a corporation. For the majority of cases, public corporations are owned by dozens to millions of people. Being a stockholder does not mean that you run the company directly, but it allows you a vote in company policies and important actions.
Companies do not start out public; at first, every business is private, owned by either one or a multitude of people in a sole proprietorship or partnership. A business may decide it wants to go public for a variety of reasons, and after the decision to convert is made, the additional choice of how to go public must be considered.
Why does a company decide to go public? The primary reason for doing so is to raise capital for intense expansion or growth. By making your company public, it is possible to raise tens of millions of dollars in a short amount of time. This is done by selling stock of the company, and depending on how much you diversify the stock, shares are worth more or less. For example, you could have ten thousand shares selling at ten dollars a share for a total of one hundred thousand dollars in shares.
Or, you could sell five thousand shares at twenty dollars a share and maintain the same profit. Keeping the number of shareholders low has its advantages, such as more control, but if you offer cheaper stock, it is easier to attract investors. With the power of stock, companies have what can be considered to be an additional form of currency, as they can use stock to finance purchases. Also, whenever the company needs more money, they can just issue more stock, which can be useful in sticky situations.
Another reason for going public is the image. Public companies are seen more favorably by consumers, as these are the companies that are powerful, reliable, and established. For companies seeking the image benefit of being public, a reverse merger may be the ideal solution. Many people think the only way to go public is by offering an initial public offering, or IPO. IPOs are great for raising a huge amount of money fast, but the process of issuing an IPO is incredibly complex, can take years, and is very costly. Therefore, for smaller companies who cannot even afford to utilize an IPO, a reverse merger is the only option.
With a reverse merger, also known as a reverse takeover (RTO), a private company joins an already public company, one which has no assets or liabilities, and/or has little to no business. Once the merger is complete, a new company is formed, and the name is usually changed to reflect the merger. In this way, a private company can become a public company. In an RTO, the original public company is known as a public shell, as it has essentially no assets, and thus the business itself is its corporate structure.
The advantages of an RTO include that it is cheaper, easier, faster, and more efficient than alternative methods of going public. However, an RTO does not come with the large capital gains associated with an IPO, so this route is not to be taken by a large company.
Author Resource:-
Our corporate financial consultant and capital markets expert with many years of experience helping companies with reverse mergers information and the going public process.
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