Question 1

What does it mean for a company to raise capital in the public markets?

Accepted Answer

Raising capital in the public markets means a company obtains funding by selling its securities to public investors. The SEC describes facilitating capital formation as one of the three parts of its mission, alongside protecting investors and maintaining fair, orderly, and efficient markets. The SEC states that since its founding in 1934 it has stayed true to its mission of 'protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.' On capital formation specifically, the SEC states that its 'regulatory governance provides companies and entrepreneurs with a variety of avenues to access the U.S. economy's capital markets to help them create jobs, develop life-changing innovations and technology, and provide financial opportunities for those who invest in them.' A public capital raise is the mechanism by which a company accesses those markets to fund its business.

Question 2

What is the primary market, and why is it where capital is actually raised?

Accepted Answer

The primary market is where newly issued securities are sold to investors and the issuer receives the proceeds. It is in the primary market — not in later trading — that a company actually raises capital, because only the sale of newly issued securities delivers money to the issuer. The SEC's Investor.gov glossary defines the primary market as 'Markets in which newly issued securities are sold to investors and the issuer receives the proceeds.' In a registered public offering such as an initial public offering, the company issues new securities and sells them into this primary market; the cash paid by investors, net of underwriting discounts and offering expenses, is the capital the company raises. How the proceeds figure is computed for an IPO — gross versus net, and primary versus secondary shares — is addressed on the IPO Capital Raise page.

Question 3

Does a company raise money when its shares trade in the secondary market?

Accepted Answer

No. The secondary market is where existing securities are bought and sold among investors; the issuer is not a party to those trades and receives none of the proceeds. A company raises capital only when it sells newly issued securities in the primary market. Investor.gov defines the secondary market as 'Markets where existing securities are bought and sold.' When a public company's shares change hands on an exchange or over the counter, the money passes between the selling investor and the buying investor. Consistent with this, Section 4(a)(1) of the Securities Act of 1933 exempts from the Section 5 registration requirements 'transactions by any person other than an issuer, underwriter, or dealer' — the ordinary investor-to-investor resales that make up secondary trading. Secondary trading provides liquidity and price discovery for investors, but it does not raise capital for the issuer.

Question 4

What is the registration-based path to raising public capital under Section 5 of the Securities Act?

Accepted Answer

Under Section 5 of the Securities Act of 1933, a company generally may not sell securities to the public until it has filed a registration statement with the SEC and that statement has become effective, and it may not offer the securities at all before a registration statement is filed. Registration is the default gateway to raising capital from the public. Section 5(c) makes it unlawful to offer to sell or offer to buy a security through interstate commerce or the mails unless a registration statement has been filed; Section 5(a) makes it unlawful to sell a security unless a registration statement is in effect; and Section 5(b) governs the prospectus that must be used. The SEC states the same sequence in plain language: 'the Securities Act requires your company to file a registration statement with the SEC before it may offer its securities for sale,' and the company 'may not actually sell the securities covered by the registration statement until the SEC staff declares the registration statement effective.' The communications a company may and may not make during the registration process are addressed on the Waiting-Period Communications page.

Question 5

Why do companies raise capital by going public?

Accepted Answer

The SEC states that companies go public for a number of reasons, which can differ for each company. Those reasons include raising capital and broadening future access to capital, increasing liquidity for the company's stock, acquiring other businesses with the company's stock, attracting and compensating employees with stock, and creating publicity, brand awareness, or prestige. The SEC's going-public guidance lists these reasons: 'To raise capital and potentially broaden opportunities for future access to capital'; 'To increase liquidity for a company's stock, which may allow owners and employees to sell stock more easily'; 'To acquire other businesses with the public company's stock'; 'To attract and compensate employees with public company stock and stock-options'; and 'To create publicity, brand awareness, or prestige for a company.' Raising capital is one motive among several, and the SEC frames the decision as company-specific rather than uniform.

Question 6

What does going public involve, and what obligations come with it?

Accepted Answer

The SEC states that going public typically refers to a company undertaking its initial public offering by selling shares of stock to the public, usually to raise additional capital. It also notes that a public offering takes time and money, and that the company takes on significant new obligations, including SEC reporting and keeping the market informed. The SEC states: 'Going public typically refers to when a company undertakes its initial public offering, or IPO, by selling shares of stock to the public, usually to raise additional capital,' and that 'after its IPO, the company will be subject to public reporting requirements.' Among the factors it lists to consider before becoming a public company: the offering 'will take time and money to accomplish'; the company 'will take on significant new obligations, such as filing SEC reports and keeping shareholders and the market informed'; and 'information about your company, such as financial statements and disclosures about material contracts, customers and suppliers, will become available to the general public (including your competitors).' The specific post-offering reporting duties are addressed on the Becoming a Reporting Company page.

Question 7

Is raising public capital limited to the initial public offering?

Accepted Answer

No. The initial public offering is a company's first registered sale of stock to the public, but a company that is already public can raise additional capital through later registered offerings. The SEC describes going public as usually to raise additional capital, and notes that companies may pursue a registered offering to raise more capital, to respond to investor calls for liquidity, or both. The SEC states that many mature companies who have raised capital using exempt offerings in the private markets 'elect to "go public," such as through a registered offering, either to raise additional capital, in response to investor calls for liquidity, or both.' The IPO is the entry point to the public equity market; once public, a company can return to that market with additional registered offerings, subject again to the Securities Act's registration requirements. The full menu of registered and exempt routes for raising capital is addressed on the Capital Raising Guide page.

Question 8

What is the SEC's role in facilitating capital formation?

Accepted Answer

Facilitating capital formation is the third part of the SEC's three-part mission. The SEC also maintains an Office of the Advocate for Small Business Capital Formation, an independent office established by Congress to advance the interests of small businesses and their investors at the SEC and in the capital markets. The SEC lists 'facilitating capital formation' alongside protecting investors and maintaining fair, orderly, and efficient markets as its mission. The Office of the Advocate for Small Business Capital Formation is described as 'an independent office established by Congress to advance the interests of small businesses, from startups to small public companies, and their investors at the SEC and in the capital markets.' The office works to 'identify and address capital-raising issues' through outreach and education, and by analyzing the potential impact of proposed SEC and self-regulatory organization rules on small businesses and their investors. The SEC's role is to regulate and facilitate capital raising; it does not itself provide capital.

Question 9

Does registration, or SEC review of a registration statement, guarantee that a company will raise the capital it seeks?

Accepted Answer

No. Registration is a disclosure process, not an SEC endorsement or guarantee. The SEC does not evaluate the merits of offerings, does not determine whether the securities are good investments, and cannot guarantee the accuracy of a company's filings. Registration is effective only as to the securities proposed to be offered; the amount actually raised depends on investor demand and the offering price. Investor.gov states that 'the SEC does not evaluate the merits of offerings, nor do we determine if the securities offered are "good" investments,' and that the SEC 'cannot guarantee the accuracy of the information in a company's filings.' Section 6(a) of the Securities Act provides that 'a registration statement shall be deemed effective only as to the securities specified therein as proposed to be offered.' An effective registration statement permits the offering to proceed, but it does not assure that investors will buy or that a targeted amount will be raised; how demand is gathered and the price is set is addressed on the Bookbuilding and Pricing page. Neither the SEC, FINRA, nor any exchange approves the merits of an offering.

Question 10

How does a company get its newly issued securities into investors' hands to raise the capital?

Accepted Answer

In a typical registered public offering, the company sells its newly issued securities to investment banks acting as underwriters, which then distribute those securities to investors. The SEC describes an IPO as a private company raising capital 'by selling newly-issued shares to investment banks (underwriters), which the banks then sell primarily to institutional investors.' The Securities Act defines an 'underwriter' in Section 2(a)(11) as, in general, any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of a security. In the primary-market sale, the underwriters take on the distribution of the issuer's newly issued securities and the issuer receives the proceeds. The contractual terms between issuer and underwriters, the composition of the underwriting group, and the marketing of the offering are addressed on the Underwriting Agreements, Underwriting Syndicates, and IPO Road Show pages.

Question 11

Must a company always register with the SEC to raise capital from investors?

Accepted Answer

No. The general rule is that securities offered in the United States must be registered with the SEC or must qualify for an exemption from registration. A registered public offering is the path this page describes; a company may instead raise capital through an exempt offering, such as a private placement. Investor.gov states that 'in general, all securities offered in the United States must be registered with the SEC or must qualify for an exemption from the registration requirements.' Section 4(a)(2) of the Securities Act exempts from Section 5 'transactions by an issuer not involving any public offering' — the statutory basis for private placements. Investor.gov adds that 'by exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to investors.' The full set of registered and exempt pathways is compared on the Capital Raising Guide page; this page focuses on the registered public path.

Question 12

When in a company's life does it typically raise public capital?

Accepted Answer

Companies commonly raise their early capital privately and turn to the public markets when they are more mature. The SEC describes many mature companies that raised capital using exempt offerings in the private markets electing to go public through a registered offering to raise additional capital, to respond to investor calls for liquidity, or both. The SEC states that 'many mature companies who have raised capital using exempt offerings in the private markets elect to "go public," such as through a registered offering, either to raise additional capital, in response to investor calls for liquidity, or both.' Public capital raising therefore typically sits later in a company's financing life cycle, after private rounds; the initial public offering marks the transition into the public equity market. The SEC's Office of the Advocate for Small Business Capital Formation studies capital formation across this life cycle, from startups to small public companies.

Feature	Primary market	Secondary market	Source
What is sold	Newly issued securities sold by the issuer	Already-outstanding securities traded between investors	Investor.gov — Primary / Secondary Market · source
Who receives the money	The issuer receives the proceeds	The selling investor is paid; the issuer receives nothing	Investor.gov — Secondary Market · source
Typical transaction	An IPO or a later registered offering of new shares	Exchange or over-the-counter trading of listed shares	SEC — Going Public · source
Purpose	Capital formation — funding the issuer's business	Liquidity and price discovery for investors	SEC — About the SEC (Mission) · source
Securities Act treatment	The offering must be registered under Section 5, unless an exemption applies	Ordinary investor resales fall under the Section 4(a)(1) exemption from Section 5	Securities Act of 1933 §5; §4(a)(1) · source

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