Public listings aren’t just important for founders and CEOs. They can also create a lot of excitement for investors and all of Wall Street.
How Companies Go Public
Companies have a few different options to go public.
First, there’s the traditional initial public offering or IPO — when private companies issue new shares to the public for the first time. They work with underwriters (usually an investment bank) that help with things like setting the stock price, filing important paperwork, and impressing potential investors. The process is time-consuming and complicated, but companies hope it pays off once they officially cross over to public status and (hopefully) raise money from new investors.
Another route to the public market is via SPAC, short for special-purpose acquisition company, which is kind of like getting in through the back door. SPACs are basically shell companies (also known as "blank-check companies") that raise money through an IPO, then buy an undisclosed private company — effectively taking that company public. Investors who bought SPAC shares pre-merger typically don't know which business the SPAC plans to acquire. Sometimes it's a good surprise, sometimes not so much. SPACs have fewer regulatory hurdles to jump through, often making them an easier option for smaller companies — especially in emerging industries like crypto.
Companies can also go public with a direct listing. It’s like the DIY version, where companies list existing shares directly on stock exchanges without working with any middlemen. Meaning fewer fees involved and more control over setting the stock price. But without that extra set of third-party eyes, they’re considered riskier.
Companies Going Public and Your Money
No matter which path companies take, going public can impact your wallet.
Are you looking for a hot investment?
They may not be new businesses, but companies going public are new to stock exchanges. Meaning, unlike stocks that have been trading for a while, you can’t use historical data to gauge performance. Investors could win big. Or not.
Pro tip: watch and wait. After an IPO or a SPAC listing, there’s a lockup period when “insiders” — like founders, employees, and VCs — can’t legally sell their shares. (Psst…this isn’t a thing for direct listers.) Letting the hype die down and seeing what happens post-lockup could give you a hint at the company’s health.
If you decide to go for it, don’t invest cash you can’t afford to lose.
Are you a fan of the brand?
Stay tuned. Issuing stock can help companies raise a LOT of money, which could be used to improve products and make users happier.
But public companies have to answer to shareholders. That can mean more pressure to make money. TBD if that leads to more ads or other changes.
Are you wondering what all this means for the economy?
Mixed messaging. Many experts think more companies going public = a strong economy. But new listings have jumped even during some not-so-great times. See: a global pandemic.
Some say more public companies can boost the economy and create more jobs.
Big names you love going public can be exciting. If you’re tempted to get in on the fun with some of your own money, make sure it fits into your larger investing strategy. And that you’ll be okay financially (and emotionally) if the investment doesn’t pay off.
Updated May 10.
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