Businesses can be privately owned, or they can be offered to the public so that anyone can purchase stock—which is referred to as an IPO. At the core, these types of companies may run very similarly, but here are the biggest differences between an IPO and a business that is privately-owned.
Investors
An IPO is when the shares of a private company are put up for sale to the public for the first time through the stock market, which means that there are investors who wish to purchase shares in the corporation. This could potentially be anyone that has the money to buy stock. Stocks can range quite a bit, but most fall within the $8 to $25 range. Many investors choose to purchase thousands of stock in the same firm to up the amount of potential profit in the IPO company.
A publicly owned company has to find accredited investors such as investment bankers, pensions, and mutual funds on their own. Usually a few select individuals are offered the opportunity to invest in the company as shareholders. Both shareholders in an IPO and private placement have the same rights within the company, but a private corporation selects those who can invest.
Regulations
An IPO makes the shares public, which means that the company has to abide by the Securities and Exchange Commission (SEC). The SEC has many rules and regulations put in place to be sure investors receive sufficient disclosure when they purchase any assets. This is done to avoid a stock market crash like the one that happened in 1929. Some consider it harder to participate in the public stock market because of the regulations put in place by the SEC, which is why many corporations choose to stay private.
A private placement has no need to follow the rules of the SEC due to Regulation D, which gives businesses the chance to gain capital much faster than public offerings. The transactions usually involve very few investors that purchase the majority of the shares. Many of the financial reporting requirements aren’t applicable to private trading.
Risk
IPOs are considered risky for a couple of reasons. The first of which is that a company that's offering shares ais looking for capital for a purposes such as growth or research, which can be dangerous for some corporations if the plan fails. Second, there's a lack of stock-trading history. An investor could very well purchase thousands of shares and then the stock could perform poorly. Finally, the companies are often quite young and small when compared to other corporations on the stock exchange.
Private placement comes with risk, as well. Companies under Regulation D aren’t required to report finances, meaning investors may purchase shares in a company without a credit rating. For this reason, private placements can be considered riskier than IPOs, especially since the shares cannot be traded on a secondary market after purchase—making it tough for liquidation when compared to publically traded stock.
