Public vs private companies, going public and going private

What is the difference between public and private companies?

A public (listed) company has some or all of its shares listed and traded on a stock exchange , a rules-based, open market where prices and volumes are visible. A private company has no listed shares. Four differences follow from that.

	Public (listed)	Private
Exchange listing and liquidity	shares trade on an exchange; easy to buy and sell	no listing; a seller must find a buyer and may need the company’s consent
Price transparency	continuous market price	no visible price
Share issuance	can issue new shares to the public; shares then trade in the secondary market	private placements to a few investors, often accredited or sophisticated investors
Registration and disclosure	registered with a regulator; regular audited reports; insider trades and major holdings disclosed	far fewer requirements

Do not confuse “public limited company” with “public company”

“Public limited company” is a legal form from the first lesson. “Public company” means listed. Most listed companies are public limited companies, but a public limited company does not have to list. Public does not mean government-owned either.

Liquidity and price transparency

On an exchange, buyers and sellers deal directly with each other in the secondary market. An investor can open a position with a buy order and close it with a sell order, quickly for a liquid stock and more slowly when a stock trades rarely. The exchange also publishes a share price, so anyone can track how the market values the company.

A private shareholder must find a willing buyer and negotiate a price, and the company may block the transfer. Private investments are therefore locked up until the company is sold or goes public.

How shares are issued

A listed company can issue more shares whenever it needs them, and the new shares trade in the secondary market straight away. A private company raises smaller amounts from fewer investors, usually with longer holding periods. It offers shares by private placement , on terms set out in a legal document. Regulators often limit private placements to accredited investor s (also called qualified or sophisticated investors), whom they judge able and willing to carry the greater risk of a non-public offering. Public companies can also use private placements, within regulatory limits.

Registration and disclosure

Disclosure is the defining burden of being public. A public company must register with a regulator and file regular financial reports. It must also disclose large changes in voting holdings and trades in its shares by managers and directors, because such trades can signal confidence or doubt. A private company faces far lighter rules, though laws against fraud and the duty to file tax returns still apply. Some private firms disclose to owners and lenders voluntarily, especially if they expect to raise money later.

Free float

The free float is the part of a company’s shares that actually trades: shares not held by insiders, strategic investors or sponsors. It is usually stated as a percentage of the shares outstanding.

$$\text{FF} = \frac{N - H_1 - H_2}{N}$$

Here $N$ is the number of shares outstanding and $H_1$, $H_2$ are the shares held by locked-in holders such as founders and a strategic partner.

Why would a company stay private?

Staying private means fewer stakeholders to answer to, lower disclosure and compliance costs, information kept from competitors and control for the existing owners and managers. Many early-stage companies are private, and an investor who backs a successful one can earn high returns. Evidence that listed companies are held back by short-term thinking is weak, so do not use it as a reason.

How does a private company go public?

Going publica private company becomes a listed (or listed-owned) one

• Initial public offering Memorize new shares, underwriter, capital to the company
• Direct listing Memorize existing shares, no underwriter, no new capital
• Acquisition Memorize the private firm is bought
  • By a listed company Use it becomes part of it
  • By a SPAC Memorize a blank-check shell merges with it

An initial public offering (IPO) sells new shares to the public. The company must meet the exchange’s listing requirements and normally hires investment banks as underwriter s to manage the sale and take on the risk of placing the shares. The proceeds go to the company, and its shares then begin to trade.

A direct listing is rarer. No underwriter is involved and no new shares are issued, so no capital is raised. The company lists its existing shares at a price set by the market, and shares become available as current holders sell. It can be quicker and cheaper, and it avoids diluting current holders, so it is used mostly by large, well-known companies.

A private company can also go public by being acquired. If a listed company buys it, the private firm becomes a part of a public company, usually a much bigger one. A special purpose acquisition company (SPAC) is a different route. A SPAC is a listed shell, a “blank check” with no business, that raises cash in its own IPO. The cash sits in a trust account and can be spent only on an acquisition, which must happen within a set period such as 18 months, or the money returns to investors. When the SPAC buys a private company, that company becomes public. SPACs have largely replaced the old reverse merger, in which a private firm took over a dormant listed company.

Route	New capital raised?	Underwriter?	Note
IPO	yes, new shares sold	yes	must meet listing rules
Direct listing	no, existing holders sell	no	faster and cheaper; suits large, well-known firms
Acquisition by a listed company	n/a	n/a	the private firm becomes part of a public company
SPAC	the SPAC raised cash in its own IPO, held in trust	for the SPAC	deadline to buy a private company, else money returned

Exam tip Ask two questions: does new money reach the company, and is there an underwriter? IPO: yes and yes. Direct listing: no and no.

How does a public company go private?

In a go-private (take-private) deal, investors buy all the publicly traded shares and delist the company. They usually pay a premium over the current share price and often borrow to fund the purchase, which is why it is called a leveraged buyout . They act because they believe changes such as new management, asset sales, restructuring or cost savings would lift the value above the share price plus the premium and financing costs. Out of public view the work is easier, and the investors may relist the company several years later at a higher valuation.

Listing trends differ by region. Many emerging economies have a growing number of listed companies as they open up and attract foreign capital. Many developed economies have fewer, because of mergers, abundant private capital from venture capital and private equity, and owners who prefer to keep control.

Who owns corporate issuers?

Shareholderspublic and private companies alike

• Individuals Know the idea founders, employees, retail investors
• Institutions Know the idea pension funds, mutual funds, other funds
• Other corporations Know the idea strategic holders, parents
• Governments Use it state-owned enterprises, 100% or partial
  • Keep 100% Use it public goods, natural resources
  • Sell stakes Use it raise capital, diversify, privatize
• Non-profits Know the idea foundations and endowments with financial and social goals

Shareholders are not only individuals and institutions. Governments sometimes create a legally separate corporation, with a board, managers and audited accounts, while keeping 100% or part of the shares. Such a state-owned enterprise may supply public goods, such as infrastructure, or run a dominant domestic industry such as energy. In many emerging markets they are gradually sold to private investors through an IPO to raise capital and diversify the economy. Deregulation and technical change push in the same direction: telecommunications and power generation moved from government monopolies toward private ownership. Non-profit foundations and endowments also own shares, with social goals alongside financial ones.

Go deeper Why SPACs replaced reverse mergers

In a reverse merger, a private firm took over a dormant listed company and inherited its listing, along with its history and its liabilities. A SPAC is a clean shell that exists only to buy a business, with cash already in trust and investors who can walk away. That clarity is why the SPAC became the usual shell route.

Go deeper State-owned enterprises: why keep them, why sell stakes

A government may keep 100% where a private owner would not provide the service, or would not provide it fairly or efficiently: roads, rail, postal services, or a natural resource whose profit should go to the country. It may sell part of it to bring in foreign capital, to diversify away from one commodity, or to introduce competition and push down costs. A partial IPO transfers capital and discipline without handing over control.

Go deeper Why listings are falling in developed markets

A shrinking count of listed companies does not mean the economy is shrinking. Mergers combine listed firms into fewer, bigger ones. Venture capital and private equity let firms raise large sums without listing. And many firms simply prefer to avoid disclosure, compliance costs and outside scrutiny while their owners keep control.