By: Julio Perez, Fall 2017 Graduate Research Assistant
I won’t explain what fruit leather is, but I will try to explain “public companies,” as opposed to “private companies.” It all centers around a company owner’s choice between gathering capital versus maintaining control of the company. The NASDAQ website defines a public company as a company that has held an “initial public offering” and whose shares are traded on a stock exchange or in the over-the-counter market. An “Initial public offering” (or IPO) is a company’s initial (or first) offer of stock to the public (you, me, the people running around Wall Street, and anyone buying stock online).
The IPO really is the graduation stage of a company’s process of going public, the culmination of months or years of planning, filling out paperwork, and meeting requirements established by the government that every company must satisfy before going public. A major aspect of going public, in fact, is a company’s willingness to abide by the tighter restrictions and regulations, not to mention the frequent mandatory reporting standards imposed by regulating agencies, and having to keep their stockholders appraised to activities the company is engaged in.
This doesn’t mean private companies can be as shady as they like, because they still have legal obligations. Why ever go public, then? The key is often raising funds. Otherwise, investing in a private company would require you to either pool your funds with other like-minded fruit leather lovers or have substantial capital of your own and meet up with the founder of the company and offer to invest in their venture. Troublesome, time consuming, expensive… However, not every business owner wants to be the next McDonalds, and they might be completely happy to keep their investor base small if it means not having to deal with the increased cost, scrutiny, and sophistication involved with being a private company.
According to the SEC, the public disclosures required and associated with being a public company protect investors. After all, it is difficult for a company to scam investors or otherwise engage in dubious business practices when they have to release monthly reports of their business, not to mention the potential thousands of investors who would be affected by such practices.
Translation: “I can’t wait for my favorite fruit leather company to allow me to own a part of it on the open market and provide detail on their operations so I can make a prudent investment decision.”