Businesses can go one of two ways. They can be owned privately or they can be offered to the public and then anyone can purchase stock. As always in the world of finance, it is important to note the differences between an IPO and a privately-owned business.
IPO vs. Privately-Owned Business: Investors
When the shares of a company are offered to the public for the first time, it is called an IPO, or an Initial Public Offering. Generally speaking, anyone with money is able to purchase stocks. Stock prices are roughly between $8 to $25, and as a result, many investors will purchase hundreds of stock from the same firm, just to increase their potential for profit.
On the other hand, a publicly owned company is required to find certified investors by themselves. Depending on the individual, some people are offered the chance to invest in a company as a shareholder. In both an IPO and a private company, shareholders have the same rights, however, a privately-owned business gets to choose the people who can invest in their business.
IPO vs. Privately-Owned Business: Rules and Regulations
If an IPO makes the shares public, then the company is required to follow the regulations of the Securities and Exchange Commission. To avoid a stock market crash, the SEC places great value on rules and regulations. Some, however, choose to stay private as the SEC’s regulations can make being involved in the public stock market much harder to bare.
That said, a privately owned business does not have to follow the regulations of the SEC due to Regulation D. Regulation D gives businesses the chance to acquire capital much faster than public offerings can.
IPO vs. Privately-Owned Business: Risk Factors
IPOs are considered to be risky ventures for a variety of reasons. First, if a company is offering shares because they are looking for capital for growth or research purposes, this can be extremely dangerous if the plan does not succeed. Second, IPOs lack stock-trading history. For instance, an investor could purchase hundreds of shares and then the stock could plummet. Third, IPO companies tend to be immature in comparison to other companies in the stock exchange.
With that in mind, privately-owned companies also come with their fair share of risk. The issue with Regulation D is that the companies in which the regulation applies to, do not have report finances. This means that an investor could purchase a share in a company without any sort of credit rating. As a result, some view owning a private company to be a riskier venture than an IPO.
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