What Does It Take for a Company to Go Public?
Companies "go public," that is, issue shares of stock for sale to the general public, to raise capital to help the company expand, to pay down debts and sometimes to allow company founders and early investors a way to recoup their investment. Companies issue stock in an initial public offering. Traditionally, an investment bank handles the issuance of new shares of stock, selling the stock to its clients in exchange for a percentage of the proceeds, typically 7 percent.
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Legal Requirements
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To issue shares to the public, a company must be a C corporation; S corporations may not be publicly held. Even though S corporations issue stock, they may not have shareholders who reside outside of the United States, which precludes the issuance of stock over the public markets. Companies issuing public stock must also file a prospectus with the U.S. Securities and Exchange Commission, detailing the company's potential risks and disclosing its material financial information.
Financial Requirements
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Companies issuing shares of stock for sale to the public must undergo a good deal of financial scrutiny. They must have an independent accounting firm audit and certify their financial records and financial reports, and the president and chief financial officer must personally certify that the financial records are true and correct to the best of their knowledge. This requirement is due to a law called Sarbanes-Oxley that was passed after Enron went bankrupt in 2001.
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Business Model
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Companies going public must have a sustainable and scalable business model to attract investors. The business should have reasonable prospects of generating an acceptable return to shareholders given the risks specific to that company.
Controls
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Companies going public should establish a set of effective financial controls on the company's assets. This means an independent and vigilant board of directors, a system of auditing and cross-checking expenditures, independent oversight of the company's financial management and an effective means of forecasting earnings.
Experienced Management
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Few managers can manage a business equally well from the start-up phase all the way through the initial public offering. The executive skill set required to run a small business of 10 employees is very different than the executive skill set it takes to manage a larger business, plus handle the specific administrative, financial and legal requirements of a publicly-traded company. The company's board of directors should insist that the company's management team expand and improve with the company.
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