Publicly Held Companies

A publicly held company is one whose stock is owned and traded by the public. A company becomes publicly held through an initial public offering (IPO) of securities in compliance with the [Page 717]registration requirements of the Securities and Exchange Act of 1933 (“the 1933 Act”) as well as applicable state laws. Companies “go public” to raise money for working capital, research and development, new business ventures, or debt retirement. Additionally, a corporation may become publicly held to improve shareholder liquidity, boost the firm's marketplace profile, or to improve its chances of attracting and retaining qualified personnel. On the other hand, an IPO is an expensive and time-consuming experience that subjects the company to state and federal filing and disclosure requirements, exposes management to increased personal liability for corporate actions, and results in a loss of corporate flexibility and control.

Public relations practitioners who represent organizations that intend to go public must be aware that Section 5(c) of the 1933 Act prohibits companies from offering stock before filing a detailed registration statement with the Securities and Exchange Commission (SEC). The 1933 Act defines an “offer” broadly as any “attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value” (15 U.S.C. §77b[3]). A company that issues a press release about an intended public offering before a registration statement is filed, for example, is likely to have made an illegal offer to sell an unregistered security. Although public relations practitioners can continue to provide product-based information and engage in regular communication activities during this prefiling period, care must be taken to avoid what the SEC calls “conditioning the market” by generating publicity that arouses interest in the company's securities.

After the registration statement is filed, the SEC imposes a waiting period during which the company must refrain from advertising its shares or otherwise offering them for sale except pursuant to a preliminary prospectus that complies with the requirements of Section 10 of the 1933 Act. This “quiet period” is designed to give potential investors time to familiarize themselves with the detailed information disclosed in the registration process. After the SEC declares the registration statement effective, the registered securities can be bought and sold legally.

While the 1933 Act regulates primarily the initial issuance of securities, the Securities and Exchange Act of 1934 (“the 1934 Act”) regulates the subsequent trading of those securities. Pursuant to the 1934 Act, most public companies must file annual, quarterly, and current reports with the SEC about their operations. Especially relevant for public relations practitioners are the 1934 Act requirements that public companies provide an annual report to shareholders and conduct a yearly shareholder meeting where shareholders elect the board of directors and vote on corporate policy proposals, including proposals submitted by shareholders. Shareholders who cannot attend the annual meeting can vote by proxy. Under the 1934 Act, shareholders must be furnished with proxy statements that disclose all-important facts about matters to be voted on at shareholders' meetings.

SEC Rule 10b-5 requires a public company to make full and timely public disclosure of all material information that could affect an investor's decision to purchase, sell, or hold the company's stock. Companies that knowingly make false or misleading statements of a material nature have committed securities fraud. Furthermore, any corporate insider (including public relations representatives) who knowingly disseminates a false or materially misleading press release or other corporate communication is also liable for fraud. Ignorance is no defense—public relations practitioners are expected to conduct a “reasonable investigation” to determine if statements made in corporate communications are, in fact, true. State “blue-sky” laws also prohibit fraud in connection with the sale of securities.

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