When a privately owned company decides to distribute its shares to the general public, it goes through a

process known as an initial public offering (IPO).

List and describe at least three advantages and three
disadvantages to having a firm's shares traded in the public equity market.

Advantages:
• New capital is raised. When the firm sells its shares to the public, it acquires new capital that can be invested in the
firm.
• The firm's owners gain liquidity of their shareholdings. Publicly traded shares are more easily bought and sold, so
the owners can more easily liquidate all or part of their investment in the firm.
• The firm gains future access to the public capital market. Once a firm has raised capital in the public markets, it is
easier to go back a second and third time.
• Being a publicly traded firm can benefit the firm's business. Public firms tend to enjoy a higher profile than their
privately held counterparts. This may make it easier to make sales and attract vendors to supply goods and services to
the firm.
Disadvantages:
• Reporting requirements can be onerous. Publicly held firms are required to file periodic reports with the Securities
and Exchange Commission (SEC). This requirement is not only onerous in terms of the time and effort required but
also some business owners feel they must reveal information to their competitors that could be potentially damaging.
• The private equity investors now must share any new wealth with the new public investors. Once the firm is a
publicly held company, the new shareholders share on an equal footing with the company founders the good (and
bad) fortune of the firm.
• The private equity investors lose a degree of control over the organization. Outsiders gain voting control over the
firm to the extent that they own its shares.
• An IPO is expensive. A typical firm may spend 15 to 25 percent of the money raised on expenses directly connected
to the IPO. This cost is increased further if we consider the cost of lost management time and disruption of business
associated with the IPO process.
• Exit of the company's owners is usually limited. The company's founders may want to sell their shares through the
IPO, but this is not allowed for an extended period of time following the IPO. Therefore, this is not usually a good
mechanism for cashing out the company founders.
• Everyone involved faces legal liability. The IPO participants are jointly and severally liable for each other's actions.
This means that they can be sued for any omissions from the IPO's prospectus should the market valuation fall below
the IPO offering price.