What is an IPO?
Initial Public Offering, or IPO, refers to the first time a company offers its shares of capital stock to the general public. When a company reaches a stage in its growth process and wants to gain access to more funding, the company may decide to go to the public markets with an IPO to raise money from a broad range of investors instead of getting money only from a bank or private investors. Also, IPOs can facilitate easier acquisition deals and increase the company’s exposure, prestige, and public image, which can help the company’s sales and profits. Even so, American public companies are regulated by the SEC regarding periodic financial reporting, which may be difficult for newer public companies. Most importantly, going public is an expensive process, which is why only private companies with strong fundamentals and high profitability potential go through an IPO historically.
How does an IPO work?
To register an offering in the US, a company must file a registration statement with the SEC, typically using Form S-1. Some offerings may involve other registration statement forms. An important part of this registration statement is the “prospectus” that will be used by the company to solicit investors. It is important to read the prospectus because it provides information regarding the terms of the securities being offered as well as disclosure regarding the company’s business, financial condition, management, and other matters that are key to deciding whether the offering is a good investment.
The IPO process can take from six months to over a year to complete. First, companies hire investment banks to underwrite their IPO. Most major IPOs don’t just involve one investment bank. In fact, some of the largest IPOs have had teams of investment banks. A group of underwriters who help the company determine the initial security price, buy the securities from the issuing company, and then sell the securities on behalf of the company.
The next step in the IPO process is regulatory filings. Companies must file Form S-1 with the Securities and Exchange Commission (SEC). This form includes the company’s prospectus, which shares vital information about the company and the securities it plans to offer. In the S-1, the company also discloses what it plans to do with the proceeds of the IPO.
Once the IPO is approved by the SEC, the issuing company and the underwriter will decide the offer price and the precise number of shares to be sold. This step is very important because it is the price at which the issuing company raises capital for itself. After the issue is brought to the market, the underwriter has to provide analyst recommendations, after-market stabilization, and create a market for the stock issued.
Summary：
- The Initial Public Offering (IPO) refers to a previously private company selling new or existing securities and offering them to the public for the first time.
- The main motivations for an IPO include: raising capital from sales of the shares, providing liquidity to company founders and early investors, and taking advantage of a higher valuation.
- The IPO process can take from six months to over a year to complete. It involves hiring investment banks to underwrite their IPO, filling out regulatory filings, and deciding the offer price and the precise number of shares to be sold, etc.
