Which of the Following Happens When a Company Goes Public?

A company going public marks a major shift in how it operates and raises capital. Instead of relying on private investors, it offers shares to the general public, allowing anyone to become a shareholder. This process, known as an initial public offering (IPO), provides access to substantial funding but also introduces new regulatory and reporting obligations.

This transition affects ownership structure, financial transparency, and corporate governance. Understanding these changes is essential for investors and business owners.

Mandatory Registration

Before a company can sell shares to the public, it must meet regulatory requirements designed to protect investors and ensure transparency. The most important step is registering with the Securities and Exchange Commission (SEC) under the Securities Act of 1933. This requires filing a registration statement, typically Form S-1, which includes financial disclosures, risk factors, and operational details. The SEC reviews this filing to ensure all necessary information is available to investors but does not verify the company’s financial health or business prospects.

The registration statement consists of two main parts: the prospectus, which is available to the public, and additional private filings for regulators. The prospectus includes audited financial statements, management’s discussion and analysis (MD&A), and disclosures on executive compensation, legal matters, and potential risks. Companies must follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) to ensure consistency in financial reporting.

Beyond SEC registration, companies must comply with the Sarbanes-Oxley Act of 2002, which strengthens corporate governance and internal controls. Section 404 requires management and external auditors to assess and report on the effectiveness of internal controls over financial reporting. Non-compliance can result in fines and, in severe cases, delisting from public markets.

Distribution of Publicly Traded Shares

Once regulatory requirements are met, shares are distributed through underwriters—typically investment banks—that purchase shares from the company and resell them. The offering price is determined through a book-building process, where underwriters assess demand from institutional investors. Strong demand can lead to a higher offering price, while weak interest may result in a lower valuation.

Institutional investors, such as mutual funds and pension funds, often receive priority in share allocation due to their ability to buy large quantities. Retail investors may access shares through brokerage firms, though allocations are usually smaller. Some companies also reserve shares for employees through directed share programs, allowing key personnel to acquire stock at the IPO price.

Proceeds from the IPO can be used for expansion, debt repayment, or other corporate initiatives. Early investors and company executives may also sell shares, though they are often subject to lock-up periods—typically 90 to 180 days—preventing immediate sales to avoid market instability.

Stock Exchange Listing

After the IPO, the company must list its shares on a stock exchange, where they can be bought and sold. Each exchange has specific listing requirements, including financial thresholds and corporate governance standards. For example, the New York Stock Exchange (NYSE) requires at least 400 shareholders and a minimum of 1.1 million publicly traded shares. Nasdaq sets minimum market value requirements for publicly held shares, typically between $8 million and $45 million, depending on the listing tier.

Choosing an exchange depends on factors such as industry focus and investor base. Technology companies often prefer Nasdaq due to its strong presence in the sector, while firms seeking prestige and stability may opt for the NYSE. Listing fees vary, with Nasdaq charging between $55,000 and $320,000 and NYSE fees reaching up to $500,000, depending on market capitalization. Annual listing fees can exceed $100,000 for large companies.

Once listed, the company’s stock is assigned a ticker symbol and begins trading. The exchange facilitates price discovery through continuous auctions, where buyers and sellers submit orders. Trading volume, bid-ask spreads, and institutional participation affect liquidity, which is important for maintaining investor confidence. Companies with low liquidity risk delisting if they fail to meet minimum trading volume or market capitalization requirements.

Company Ownership Changes

Going public alters a company’s ownership structure, shifting control from a small group of private investors to a broader base of public shareholders. Institutional investors, such as pension funds and mutual funds, often acquire significant stakes, giving them influence over corporate decisions through voting rights attached to common stock. Proxy voting allows shareholders to participate in board elections, executive compensation decisions, and major corporate actions.

Public ownership also increases the risk of hostile takeovers. If an investor or competitor acquires a controlling interest, they can push for leadership changes or strategic shifts. To prevent this, companies may implement anti-takeover measures such as staggered board elections, poison pills, or dual-class share structures. For example, Meta and Alphabet issue Class A shares with one vote per share and Class B shares with multiple votes per share, allowing founders to retain control despite public ownership.

Ongoing Reporting Duties

Public companies must comply with strict reporting requirements under the Securities Exchange Act of 1934. They must file annual reports (Form 10-K), quarterly reports (Form 10-Q), and disclose significant corporate events through current reports (Form 8-K). These filings include financial statements, management discussions, and disclosures on market risks, legal proceedings, and executive compensation.

Companies must follow Regulation Fair Disclosure (Reg FD), which prohibits selective disclosure of material information. Earnings calls, press releases, and investor presentations must ensure all shareholders receive the same information simultaneously. Failure to meet reporting obligations can result in penalties, legal action, or delisting from stock exchanges.

Governance Modifications

Public companies must strengthen governance structures to meet regulatory requirements and investor expectations. This often involves restructuring the board of directors, improving internal controls, and adopting policies that promote accountability. Independent directors play a key role in overseeing management and ensuring executive decisions align with shareholder interests. Many exchanges, including the NYSE and Nasdaq, require a majority of board members to be independent.

Audit committees, composed entirely of independent directors, oversee financial reporting and compliance with accounting standards such as GAAP or IFRS. These committees work with external auditors to assess internal controls and identify potential fraud or misstatements. Executive compensation often shifts to include performance-based incentives, aligning management interests with shareholder value. Institutional investors may also push for governance changes, including leadership adjustments or environmental, social, and governance (ESG) initiatives.