Definition
A public offering, also known as a public issue, is the sale of equity shares or other financial instruments by an organization to the general public in order to raise capital. This process is commonly associated with a company transitioning from being privately held to publicly traded, often through an initial public offering (IPO). During a public offering, the issuing company discloses detailed information about its financial health, operations, and future business prospects as part of a regulatory filing known as a prospectus.
Examples
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Amazon.com Inc. IPO (1997):
In 1997, Amazon went public with an initial public offering, raising $54 million. This allowed the company to expand its operations and invest in its infrastructure.
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Facebook Inc. IPO (2012):
Facebook’s IPO in 2012 was one of the most highly anticipated initial public offerings. The company raised approximately $16 billion, facilitating its further growth and expanded services.
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Uber Technologies Inc. IPO (2019):
Uber went public in 2019, raising $8.1 billion. While its IPO faced initial price volatility, it highlighted public offering routes for sharing economy firms.
Frequently Asked Questions
What is a public offering?
A public offering is the sale of company securities to the general public, typically through a stock exchange, ensuring wider ownership and capital influx.
How does a public offering differ from a private offering?
A public offering is available to the general public and must adhere to strict regulatory requirements, whereas a private offering is limited to a select group of investors and is less regulated.
What is an Initial Public Offering (IPO)?
An Initial Public Offering (IPO) is a type of public offering where a private company sells its shares to the public for the first time, transitioning to a publicly traded entity.
What are the benefits of a public offering for a company?
The benefits include access to capital for growth, increased public visibility, potential for stock-based employee compensation, and diversified ownership.
What is a prospectus?
A prospectus is a legal document issued by companies during a public offering that provides details about the company’s operations, financial condition, risks, and management.
- Initial Public Offering (IPO): The first sale of stock by a private company to the public.
- Prospectus: A formal document required by and filed with the Securities and Exchange Commission that details a company’s financial standing.
- Underwriting: The process by which investment banks raise investment capital from investors on behalf of corporations by issuing securities.
- Secondary Offering: An offering of shares to the public by a company that has already gone public, usually for additional capital or to allow insiders to sell their shares.
- Public Float: The total number of shares a company has available for trading in the public market after an initial public offering.
Online References to Online Resources
Suggested Books for Further Studies
- “Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions” by Joshua Rosenbaum and Joshua Pearl
- “The Intelligent Investor” by Benjamin Graham
- “Barbarians at the Gate: The Fall of RJR Nabisco” by Bryan Burrough and John Helyar
- “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company, Tim Koller, Marc Goedhart, and David Wessels
- “Against the Gods: The Remarkable Story of Risk” by Peter L. Bernstein
Accounting Basics: “Public Offering” Fundamentals Quiz
### What is a public offering?
- [x] The sale of company securities to the general public.
- [ ] The sale of company products to customers.
- [ ] The transfer of shares between private investors.
- [ ] A government grant provided for public projects.
> **Explanation:** A public offering refers to the process where securities are offered for sale to the general public, typically through a stock exchange, allowing the company to raise capital.
### What type of offering is an Initial Public Offering (IPO)?
- [x] The company’s first sale of stock to the public.
- [ ] A debt issuance.
- [ ] A dividend payout.
- [ ] A government bond auction.
> **Explanation:** An Initial Public Offering (IPO) is the first sale of stock by a private company to the public, signifying the transition to a publicly traded company.
### Which document is required during a public offering to inform investors about the company?
- [ ] A tax return.
- [ ] A quarterly earnings report.
- [x] A prospectus.
- [ ] A marketing flyer.
> **Explanation:** A prospectus is a formal document required during a public offering that provides detailed information about the company’s operations, financial condition, risks, and management.
### What is underwriting in the context of a public offering?
- [ ] The process of closing a company’s financial accounts.
- [x] The process by which investment banks raise capital by issuing securities.
- [ ] The filing of taxes for a public company.
- [ ] A customer service activity.
> **Explanation:** Underwriting in the context of a public offering is the process by which investment banks raise investment capital from investors on behalf of corporations by issuing securities.
### What is a secondary offering?
- [x] An offering of shares to the public by a company that has already gone public.
- [ ] The first sale of bonds by a company.
- [ ] The repayment of an initial offering.
- [ ] A promotional discount given to shareholders.
> **Explanation:** A secondary offering is an offering of shares to the public by a company that has already gone public, often for additional capital or to allow insiders to sell their shares.
### Which type of offering is less regulated, public or private?
- [ ] Public offering.
- [x] Private offering.
- [ ] Both public and private are equally regulated.
- [ ] Neither has regulatory requirements.
> **Explanation:** Compared to public offerings, private offerings are less regulated and involve fewer disclosure requirements, often restricted to sophisticated or accredited investors.
### What is one major benefit of a public offering for a company?
- [x] Access to capital for growth.
- [ ] Reduced regulatory scrutiny.
- [ ] Guaranteed profit increases.
- [ ] Immediate operational efficiency.
> **Explanation:** One major benefit of a public offering is access to capital for growth, enabling the company to invest in expansion, infrastructure, and other strategic initiatives.
### During a public offering, what happens to the shares if demand exceeds supply?
- [ ] The offering fails.
- [x] The company may raise additional capital.
- [ ] The share price is discounted.
- [ ] Existing investors lose their shares.
> **Explanation:** If demand exceeds supply during a public offering, the company may raise additional capital, realizing higher valuations and potentially issuing additional shares.
### What is meant by 'public float' in the context of a public offering?
- [ ] Total company debt.
- [ ] The number of shares available to employees.
- [x] The total number of shares available for trading by the public.
- [ ] Company expenses.
> **Explanation:** 'Public float’ refers to the total number of shares available for trading by the public in the open market after an initial public offering.
### Which of the following is not typically included in a prospectus?
- [ ] Financial health.
- [ ] Risk factors.
- [x] Employee salaries.
- [ ] Future business prospects.
> **Explanation:** A prospectus typically includes information about the company’s financial health, risk factors, and future business prospects, but does not generally detail individual employee salaries.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
