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Going Public via Initial or Direct Public Offering: The Role of the Stock Exchange

While stock exchanges provide a number of services and functions within the financial world, their basic purpose can be summed up in two words: monitoring and marketplace. As a corporation looking to raise funds by going public, access to that marketplace is of the utmost importance.

Many individuals and companies seeking funding have a tendency to think of their issue in very self-centered terms. Some believe that once funding is obtained, the goal is accomplished and the importance of involvement with the stock exchange is minimal. If anything, though, the opposite is true. The importance of the stock exchange lies in the fact that it allows investors to maintain liquidity for their investment. When a stock is listed on a major exchange, it allows any shareholder to sell his or her shares almost instantly. In most cases, immediate small sales are available at or very near the quoted price per share.

Shares that aren’t listed through major exchanges are far less liquid, and could involve a great sacrifice or time or price to actually complete the sale. For this reason, investors pay less for stocks that can’t be readily traded on a major stock exchange. With an initial public offering, liquidity is rarely a problem. Where liquidity is an problem, a market maker fills in the gaps between supply and demand.

For direct public offerings, access to some form of stock exchange becomes more of an issue. In order for a direct public offering to be traded on an exchange, certain filings must be submitted with the SEC. If a company is able to get its offering listed on an exchange like the NASDAQ Over-the-Counter Bulletin Board system, the increased liquidity will be appreciated and rewarded by investors.

In addition to providing liquidity, stock exchanges also serve as a form of monitoring agency. In order for a stock to be listed with a particular exchange, it must complete a series of requirements and SEC filings. Presence on any given exchange indicates that all qualifying criteria have been met. Ability to qualify for listing on a stock exchange can signal a certain amount of stability in a company. While it’s certainly not a guarantee of the stock’s future performance, it does lend the company some credibility.

Because listing requirements vary for each exchange, listing on certain stock exchanges can be an even greater indicator of the quality of the company. For example, it is relatively easy for a company to be traded on over-the-counter bulletin board systems, but it is much more difficult to qualify for listing with the New York Stock Exchange. Educated investors are aware of this, and will take it into account when considering an investment.

Although the role of stock exchanges may seem peripheral at times, they serve an important function for companies considering going public. Their monitoring procedures and open marketplace ensure that qualifying companies get the most out of their offerings.

Joel Arberman is the Managing Member of Public Financial Services, LLC. We help private companies through the process of going public via an initial public offering (ipo)
or direct public offering. Learn more at