Public Companies

September 17, 2015

 

 

There’s a difference between buying public companies and buying private companies. You have to be very, very careful. We’re starting to see another round of people going around and soliciting for you to purchase in or invest in their companies. Remember with a public companies, when we say we’re going to have an IPO, that’s what we’re talking about. An Initial Public Offering (IPO) is the first time they will offer shares of their company so you can be an owner of the company through the public exchanges. If you’re a public company, you have to register with the SEC (the Securities & Exchange Commission). That’s a big deal, because that gives you information about the business. They’re required to submit all kinds of financial statements. The real word is disclosure. DISCLOSURE, DISCLOSURE, DISCLOSURE. So you have some protections built in.

 

After a company goes public, the advantage you have of owning shares in a public company is you can buy it and sell it on the secondary market—what you see every day on the ticker, reported on the Dow Jones. That’s the secondary market. It’s really easy to sell your shares. So, if you buy shares of Apple, and you decide you don’t want to own it, you can sell it very easily.

 

Public companies must regularly report on the business. So, anything about their earnings, management changes, anything that can affect the stock price, they have to put it out there. Again, it’s all about disclosure.

 

A private placement is different. Yes, you are also buying shares in in a company, but it is private. Those shares are only offered to small groups, not the general public. They do not register with the SEC. The disclosure standards are much lower, and there is no good secondary market. So, once you buy those shares, most of the time you’re stuck. That means they’re very illiquid. I always say: Be very cynical when approached by one of these folks to invest, because you’re taking great risk; and in a private placement you have to sign paperwork saying you understand what you’re getting into, you know something about investing.

 

When it comes to public versus private, I say: Buyer beware! That private placement has greater risk. It is very illiquid. You can get stuck. Yes, you could have a greater reward, but many times they can result in a total loss. So, don’t depend on your neighbor’s assessment of: “Oh, my neighbor thought it was a great deal” or “My brother thought it was a great deal.” Do your own homework. Be very cynical. Read all the paperwork. Understand what they’re going to be doing with your money when you give it to them, and make an informed decision.

 

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