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What Is Flotation?
Let me explain flotation directly: it's the process where a private company turns into a public one by issuing shares that the public can buy. This lets the company pull in financing from outside sources rather than just using its own retained earnings for new projects or growth. You should know that flotation isn't limited to the first time; it can also mean issuing more shares after an initial public offering, or IPO. In the UK, we call it flotation, but in the US, it's more commonly referred to as going public.
Key Takeaways
Here's what you need to grasp: flotation, or going public, converts a private company to public by issuing shares for purchase. It gives access to new capital, but you have to factor in the extra costs of going public. Mature companies often choose this for funding expansion, inventory, R&D, or equipment. Even after an IPO, public companies can do follow-on flotations.
Understanding Flotation
While flotation opens up capital, you must examine the expense, time, and effort involved in issuing new stock publicly. For young companies, approach flotation with caution because of the costs—it demands precise timing, structural changes, handling public scrutiny, new regulations and their costs, plus the effort to execute and attract investors. For mature companies, the need for funds like for expansion or R&D often makes the costs worthwhile. After going public, if more capital is needed, companies can flotation again via follow-on offerings.
Flotation Process
If you're a company deciding on flotation, you'll typically hire an investment bank as the lead underwriter to handle the IPO. This bank leads the process, helping determine how much money to raise from the market. They assist with all the documentation to become public and create an investment prospectus. They also market the offering in a roadshow—a pitch to potential investors by the underwriter and your executive team. During this roadshow, gauging demand is key to setting the final IPO price and the number of shares to issue.
Fast Fact
Remember, flotation applies to private companies going public and to public ones issuing more shares post-IPO.
Alternatives to Flotation
Before committing to flotation for capital, consider private funding options. These include small business loans, equity crowdfunding, angel investors, venture capital, or private placements of securities. You'll still face legal fees and structuring costs, but many private companies prefer this to avoid the transparency and high costs of an IPO and restructuring.
Advantages and Disadvantages of Flotation
On the advantages side, flotation creates share liquidity, letting early investors like venture capitalists cash out. It provides access to capital for building the business without repayment, unlike debt. Going public boosts public awareness, which can drive sales. However, disadvantages include stricter SEC regulations that private companies dodge. There's greater scrutiny with annual financial disclosures, pressuring management. Ownership gets diluted, leading to shareholder demands, and share prices can fluctuate due to market news regardless of performance.
Is Flotation a Good Strategy?
It can be, particularly if you need funds for growth projects without repayment. Essentially, it's a way to raise substantial capital debt-free.
What Are the Downsides of Flotation?
For some, the downsides are the sudden regulations, disclosure requirements, and public attention, so companies might stay private and seek other capital sources.
Must a Company Conducting Flotation Register Securities With the SEC?
Yes, absolutely—when going public, you must register the securities with the SEC and can't sell them until the registration is effective.
The Bottom Line
Flotation means issuing new securities in the market, either for a private company going public or a public one adding shares post-IPO. It requires significant effort, time, and expense, including adhering to regulations on disclosures and facing public scrutiny, which can pressure management.
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