Generally, for-profit corporations are either privately held or publicly held. Once a company decides to "go public," a wide range of rules, mostly federal, comes into play.
Why go public. The advantages of going public are the opportunities to raise money quickly, to increase the value of the company, to increase the liquidity of ownership shares, to gain access to markets for future stock offerings, and to improve the chances of a merger or acquisition. The disadvantages include a loss of operating confidentiality, a loss of operating control, and the cost.
IPO. Once a privately held company decides to go public, it has an initial public offering, which is the one-time-only sale of publicly tradable stock in a company that had previously been privately owned. The IPO is typically handled by a professional manager of such transactions, such as an investment banking house. The Securities and Exchange Commission has rules that regulate IPOs.
Securities. Securities are notes, stocks, bonds, or any other document evidencing an investment in a company with the expectation of profits from others' efforts.
Under federal law, securities sold in the U.S. must be registered, except a few special types of securities, such as private or intrastate offerings. The registration forms that are required to be filed, contain a description of the business, management information, and certified financial information. The forms are publicly available.
Companies with more than $10 million in assets and at least 500 owners must file annual and periodic statements with the SEC. These statements are also publicly available.
Additional rules govern proxy solicitations of shareholders' votes and information disclosure whenever someone tries to buy more than 5% of a company's securities.
Management restrictions. Officers, directors, and principal owners of the company's securities are held to special rules. For example, gains on the purchase and sale or the sale and purchase of company stock within a six-month period may be recoverable by the company. The limitation is part of the insider trading rules, which also prevent any investor from trading stock based on information not publicly available.
All directors of publicly traded companies have legal and ethical oversight responsibilities. The Sarbanes-Oxley Act of 2002 established a new accounting oversight board and imposed higher standards on those involved in corporate governance. Among the changes for corporate governors were new ethical standards for senior financial officers, new requirements for a company's audit committee, and a requirement that chief financial officers and chief executive officers affirm financial reports.
Executive compensation. Executive compensation typically includes salary, bonuses, and any number of creative compensation approaches, including stock options, forgivable loans, and various types of deferred compensation. Corporate compensation committees, charged with overseeing executive compensation, have come under increased scrutiny, just as audit committees have, for their lack of independence from top executives. Companies are being pressured to do a better job of tying compensation to performance.
Mergers and acquisitions. A merger is a combination of more or less equals, while an acquisition is the purchase of a smaller company by a larger company. In a merger, a new company is formed; in an acquisition, the smaller company typically becomes a division or a subsidiary of the larger company. Mergers and acquisitions trigger a wide variety of potentially complex business, tax, and antitrust considerations (for more information, see mergers and acquisitions).
Antitrust. Antitrust laws exist to promote competition by preventing monopolies and other efforts to unfairly dominate an industry. It is unlawful to engage in unfair practices in order to drive others out of business. Enforcement of antitrust laws operate a little differently than do the enforcement of many other types of laws because there is no private right of action. Thus, if a person is the victim of a deceptive statement that violates the Federal Trade Commission Act, the person doesn't sue the company. Instead, the U.S. government sues the company, through the Federal Trade Commission. The Antitrust Division of the Department of Justice enforces violations of the Sherman or Clayton acts (for more information, see antitrust laws).
Purely local efforts to monopolize are prohibited by the Illinois Antitrust Act, which prohibits price fixing, tying, exclusive dealing, and other efforts to gain a monopoly.