Flotation: What It Is, How It Works, Pros and Cons

Definition and overview

Flotation (commonly called “going public” in the United States) is the process by which a private company becomes a public company by issuing shares for purchase by the general public. The primary purpose is to raise equity capital to fund growth, research and development, acquisitions, inventory, new equipment, or other corporate needs. Public companies can also issue additional shares after their initial public offering (IPO) through follow-on offerings.

How flotation works (high level)

1. Select an investment bank to act as lead underwriter.
2. Work with the underwriter to determine how much capital to raise and the number of shares to offer.
3. Prepare required documentation and a prospectus describing the business, risks, and financials.
4. File a registration statement with the relevant securities regulator (for U.S. companies, the SEC).
5. Market the offering in a roadshow to gauge investor demand and help set the IPO price and allocation.
6. Once the registration is declared effective, complete the share issuance and list on an exchange.

Companies cannot sell registered securities until the regulator confirms the registration is effective.

Timing and company stage considerations

• Early-stage companies: Flotation can provide large capital infusions but is costly and exposes the company to public scrutiny, complex reporting rules, and governance changes. Timing and organizational readiness are critical.
• Later-stage companies: More established firms often float to finance expansion, acquisitions, or other large investments. For mature businesses, the benefits can outweigh the costs.
• Follow-on offerings: Public companies may issue additional shares later to raise more capital; the mechanics are similar to the initial offering but typically faster.

Alternatives to flotation

Companies that want to avoid public markets may consider:
– Bank loans and other debt financing
– Equity crowdfunding
– Angel investors
– Venture capital
– Private placements of securities

These private options can reduce disclosure requirements and public scrutiny, but they still involve legal, accounting, and deal-structuring costs.

Advantages

• Access to substantial capital without repayment obligations (equity, not debt)
• Liquidity for existing investors and employees, enabling exits or secondary sales
• Increased public visibility and potential brand benefits
• Use of publicly traded shares as currency for acquisitions or employee compensation

Disadvantages

• Significant costs: underwriting fees, legal, accounting, and ongoing compliance expenses
• Increased regulation and periodic public financial disclosure requirements
• Greater public and media scrutiny of operations and strategy
• Dilution of existing ownership and potential loss of control
• Exposure to market-driven share price volatility unrelated to business fundamentals

Is flotation the right choice?

Flotation can be an effective strategy when a company needs large-scale capital and is prepared for the burdens of public markets. However, the decision should weigh the capital benefits against financing costs, regulatory and reporting obligations, governance changes, and potential loss of control. Many companies choose private funding routes to avoid those trade-offs.

Bottom line

Flotation converts private equity into publicly traded shares to access external capital and liquidity. It can fuel growth but requires substantial preparation, ongoing compliance, and willingness to operate under public scrutiny. Companies should evaluate alternatives and timing carefully before pursuing a flotation.