The ‘traditional’ way to go public is through an IPO, in which an underwriter will sponsor a company’s public listing, setting a target share price. In this IPO process, a company’s financials will be heavily scrutinised before the listing, which helps to eliminate certain risks for institutional and retail investors because they’re able to make a more-informed decision.
Other ways that companies can go public include direct listings and SPACs. Direct listings enable a company to go public directly through a stock exchange. The company’s current employees and stakeholders will be able to convert their equity in the company into tradeable shares, which can then be issued through a stock exchange to the general public.
SPACs (special purpose acquisition companies) – sometimes known as reverse takeovers – are a more unorthodox way to go public, but there have been some high-profile examples in recent years. In basic terms, a SPAC is a shell company that’s set up with the sole purpose of carrying out an IPO, and then merging with a private company – taking the private company public in the process. Virgin Galactic is perhaps the most well-known company to have gone public through a SPAC.
As for why companies go public, there are several reasons. Most importantly – it’s a way to raise capital, which can help to fund expansion and further growth. Going public also carries a certain amount of prestige, especially if the company becomes a ‘blue chip’ – generally seen as the most stable companies in their sector.
Stability brings increased shareholder confidence, which will help to increase the company’s share price and subsequent market capitalisation. Eventually, a publicly listed company may start to look at acquiring other companies in its sector, and this can help to boost its own talent base – facilitating still further expansion.