Public vs private companies, going public and going private
A public (listed) company's shares trade on an exchange, giving liquidity, price transparency and access to large capital raises, at the cost of registration and heavy disclosure. A private company raises money by private placement from fewer, often accredited, investors and discloses far less. Companies go public by initial public offering (IPO), direct listing or acquisition, and go private through buyouts.
Before this: Key features of corporations: legal identity, limited liability and double taxation
On the exam
- Compare publicly and privately owned corporate issuers
Compare publicly and privately owned corporate issuers. Expect: classify a characteristic as public or private; IPO versus direct listing versus special purpose acquisition company (SPAC); why a company would go or stay private; and a free float calculation.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
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.
Here is the number of shares outstanding and , are the shares held by locked-in holders such as founders and a strategic partner.
A company has 800 million shares outstanding. Insiders hold 280 million and a strategic investor holds 120 million. The free float is closest to:
(800 − 280 − 120) ÷ 800 = 50.00%
Free float, FF50.00%
- 800−280−120=÷800=0.5
- 800ENTER280−120−800÷0.5
ENTER enter (on the HP, puts the number on the stack)
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?
- 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?
- 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.
Memorize this
MemorizePublic versus private, four differences
| Public (listed) | Private | |
|---|---|---|
| Exchange and liquidity | trades on an exchange; easy to buy and sell | no listing; seller finds a buyer; company may refuse |
| Price transparency | continuous market price | no visible price |
| Issuing shares | sells new shares to the public; they then trade in the secondary market | private placements to few, often accredited investors |
| Disclosure | registered; regular audited reports; insider trades and big holdings disclosed | far fewer requirements |
Memory hook Public = P-L-I-D: Price visible, Liquid, Issues to anyone, Disclosure heavy. Private is the opposite on each.
Know it cold Accredited investors are allowed into private offerings. "Public company" means listed, not government-owned.
MemorizeWays to go public, and to go private
| Route | New capital? | Underwriter? | Key fact |
|---|---|---|---|
| IPO | yes, new shares | yes | must meet listing rules |
| Direct listing | no, holders sell existing shares | no | faster, cheaper; big known firms |
| Acquired by a listed firm | n/a | n/a | target becomes part of a public company |
| SPAC | SPAC raised cash in its own IPO, held in trust | for the SPAC | "blank check" shell, deadline (for example 18 months) or cash is returned |
| Go private (LBO) | buyers pay a premium | n/a | usually debt-funded; shares delisted |
Memory hook IPO = Underwriter + new cash. Direct listing = Just existing holders sell. SPAC = Blank check with a ticking clock.
Know it cold Only the IPO sells new shares of the company itself to raise capital. A direct listing never raises any; a SPAC brings only the cash from its own earlier IPO.
- 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
-
- 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
Quick example
300 million shares outstanding. Founders hold 90 million and a strategic investor 45 million. 55%.
- 300−90−45=÷300= 0.55
- 300ENTER90−45−300÷ 0.55
ENTER enter (on the HP, puts the number on the stack)
How it is asked
-
IPO versus direct listing
Compared with an IPO, a direct listing:
Lists existing shares with no underwriter and no new capital. Trap: "raises new capital".
-
Free float
900 million shares; founders 180 million; strategic investor 135 million. Free float?
(900 − 180 − 135) ÷ 900 = 65%. Trap: excluding only the founders (80%).
-
What is a SPAC?
A special purpose acquisition company is best described as:
A listed shell that raises cash to buy a private company within a set period.
-
Classify the characteristic
Which is true of private companies only: "visible daily price", "negotiated sale to a few investors", "audited reports"?
Negotiated sale to a few investors. The other two are public features.
Exam traps
- Thinking a direct listing raises new capital. It lists existing shares only, with no underwriter.
- Thinking "public company" means government-owned. It means the shares are listed and open to the public.
- Saying accredited investors are those allowed to buy listed shares. They are allowed into private offerings, because regulators judge them able to bear the risk.
- Excluding only one holder from the free float. Insiders, strategic holders and sponsors are all outside it.
Checkpoint
4 exam-style questions. About 90 seconds each.
1Compared with an initial public offering (IPO), a direct listing:
2A company has 500 million shares outstanding. Its founders hold 150 million and a strategic investor holds 100 million. The free float is closest to:
3A special purpose acquisition company (SPAC) is best described as a:
4Which of the following is least likely to describe a typical go-private transaction?
Key takeaways
- Public means listed: liquidity, price transparency, broad capital access and heavy disclosure.
- Private means placements to a few investors, little disclosure, no visible price and hard-to-sell shares.
- An IPO raises money through an underwriter; a direct listing raises none; a SPAC lists first and buys a private company later.
- Go-private deals buy out the public holders at a premium, usually with debt, and delist the shares.
Quick example
300 million shares outstanding. Founders hold 90 million and a strategic investor 45 million. 55%.
- 300−90−45=÷300= 0.55
- 300ENTER90−45−300÷ 0.55
ENTER enter (on the HP, puts the number on the stack)
All Corporate Finance formulas, every lesson
Practice exam-style questions on Organizational Forms, Corporate Issuer Features, and Ownership
Questions about this lesson?
Where this comes back
- Investors and Other Stakeholders Corporate Finance
- Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits Corporate Finance
- Market Organization and Structure Equity Investments
- Overview of Equity Securities Equity Investments
- Alternative Investment Features, Methods and Structures Alternative Investments
Questions candidates ask
What is the difference between a public and a private company?
A public company's shares are listed and trade on an exchange, so they are liquid, carry a visible price and can be issued to the public, at the cost of registration and heavy disclosure. A private company's shares do not trade on an exchange and are sold by private placement to a few investors.
What is the difference between an IPO and a direct listing?
An IPO sells new shares through an underwriter, so the company raises capital. A direct listing has no underwriter and issues no new shares: existing shareholders sell on the exchange at a market price. It is quicker and cheaper but usually suits large, well-known companies.
What is a SPAC?
A special purpose acquisition company is a listed shell, often called a blank-check company. It raises cash in its own IPO, keeps it in trust and has a set time, such as 18 months, to buy a private company. If it does not, the cash goes back to investors.
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