As any banker knows, capital is crucial. Sufficient capital is needed for a bank’s growth; to withstand losses on loans, lack of earnings, and downturns in the economy; and, of course, to keep the regulators happy. There are many ways a bank can raise capital, including selling stock and issuing debt. If the bank is part of a holding company, which most banks are, it is the holding company that raises the capital and downstreams it to its subsidiary bank. The holding company, thus, might sell its stock, issue debt such as subordinated debt, or borrow funds through a standard holding company loan. Typically when a holding company sells its stock, it does so through exemptions from registration under state and federal securities laws. But sometimes the management considers a public sale of its stock — i.e., going public. This article focuses briefly on the advantages and disadvantages of going public.

First, as stated, whenever a bank holding company issues its securities, it must either register the sale of such securities with the Securities and Exchange Commission (SEC) in Washington and with any state securities commission in the state where it offers its stock, or it must have an exemption from registration. A registration statement allows the company to offer its stock publicly (generally through underwriters) to a wide range of purchasers, something that exemptions from registration generally do not allow. There can be disadvantages to going public, however.

For example, it can be a costly process. The legal, accounting, and underwriting fees can be expensive, and in a public offer, the financial statements must be audited and comply with SEC accounting rules. The ongoing activity of a public company is also expensive, in that once public, the company must file with the SEC quarterly and annual reports and also a proxy statement (all complying with SEC rules) for any meeting of shareholders. To list the stock on an exchange such as the NYSE or Nasdaq also requires a qualification process and the payment of annual fees. To comply with all these requirements, the company generally must have personnel who have had experience with previous public companies or else staff must learn on the job. That, too, can add to the expense.

In addition, public companies generally receive more public scrutiny regarding political and social issues. Certain shareholder advocacy groups will recommend votes against incumbent directors at annual meetings if the company is not sensitive to certain issues such as diversity and other social concerns. As to the scrutiny issue, a company in its public filings must make disclosures about executive compensation, related-party transactions, financial information, and other matters, making the company’s business more open to the public.

Also, as a public company, the stock is more widely held, and management (generally one or more directors and perhaps senior executives) can lose some control of the company and must give consideration to the wishes of outside stockholders.

At the same time, there can be significant advantages to being a public company. To begin with, once the company goes public, the stock is publicly traded. Many nonpublic bank holding companies have several hundred shareholders, but the ability of a shareholder (or an estate of a shareholder) to liquidate stock is limited. The public market provides liquidity for stockholders, which itself is a major advantage and can enhance estate planning.

In addition, a public market for the company’s stock also increases the value of the stock in acquisitions and can make acquisitions more efficient and opportunistic. This is a very practical and significant factor. If the stock is not public, a bank to be acquired may refuse to take the company’s stock because the lack of liquidity makes the acquisition less attractive to management and the shareholders of the company acquired. Thus, cash in that situation is the preferred and sometimes the only acceptable form of consideration. If the stock is publicly traded, however, the bank acquired may be much more inclined to receive stock, thus making the acquisition less dependent on cash paid and, therefore, more achievable for the acquiring company. In short, public company stock is given a higher value than privately traded stock.

If the company needs capital in the future, the fact that it is public can enhance capital raising because (similar to acquisitions) investors can be more attracted to and inclined to invest in a stock that is freely tradable rather than invest in the stock of a nonpublic company where the investor must hold the stock indefinitely and hope that at some point the stock can be liquidated. In the long run, raising capital through public sales of securities may be the most economical alternative. Raising capital through debt can be more costly because of interest to be paid (and collateral given) and a short term (typically five years) for repayment. Stock is permanent, and dividends are paid only when earnings warrant them.

Being a public company can also add prestige to the company and contribute not only to acquisitions but also to recruitment of personnel.

Whether a company wishes to be public, in short, may depend on the company’s future plans. If acquisitions are expected, or if the company’s stock is already widely held, going public and providing a liquid market for all stockholders, both current and future, can be a significant advantage and enhance long-term growth.