The Initial Public Offering (IPO) is an exciting event for a company, as it marks a major milestone in their growth and development. An IPO, or the sale of company shares to the public, is an important event that can have a significant impact on the company’s future.
Starting with the basics, it’s important to understand what an IPO entails, and the potential benefits it can bring to a company. With the right planning and guidance, an IPO can work wonders for a company and its shareholders alike.
Here's what you need to know about the IPO process and why it's so important.
- What is an Initial Public Offering?
- How an IPO Works
- History of IPOs
- What is the IPO Process?
- What is the Purpose of an Initial Public Offering?
- Advantages and Disadvantages of an IPO
- IPO Alternatives to Watchout for
- IPO FAQs
- How can Deskera Help You?
- Key Takeaways
- Related Articles
What is an Initial Public Offering?
An Initial Public Offering (IPO) is the process of a company issuing shares of stock to the public for the first time. It is a way for a company to raise capital to fund its operations or expand its business.
Because it typically includes a share premium for current private investors, the shift from a private to a public company can be a crucial time for private investors to fully comprehend profits from their investment. Meanwhile, public investors are permitted to participate in the offering.
How an IPO Works
An initial public offering (IPO) is the first time a company offers its shares to the public. IPOs are typically issued by companies that are mature and have a stable business model. The process begins when the company files paperwork with the relevant regulatory body, such as the Securities and Exchange Commission (SEC) in the US.
The paperwork includes a prospectus, which outlines the company's financials and other information about the company. Once the paperwork is filed, the company can start to market the IPO. The company typically hires an investment bank to help them market the IPO. The bank will then reach out to potential investors, such as hedge funds and other institutional investors.
Once the company has attracted enough investors, the company will set a price for the IPO shares. This is known as the offering price. The offering price is usually determined with the help of the investment bank.
Once the offering price is determined, the company will begin the process of selling the shares. This is known as the "roadshow," where the company will visit potential investors and explain their business and the benefits of investing in the company. Once the roadshow is complete, the company will set the date for the "closing" of the IPO.
On this date, the company will begin trading on the stock exchange and the investors who purchased the shares in the IPO will be able to sell them. The IPO process can be a lengthy one, and it is important to understand the risks associated with investing in an IPO. It is also important to consult a financial advisor before investing in an IPO.
History of IPOs
The first modern IPO was conducted by the Dutch East India Company in 1602. This company was formed to monopolize the spice trade in East Asia, and the IPO was used to raise funds to finance their trading activities. The Dutch East India Company was the first to issue shares of stock, which allowed people to invest in the company and share in its profits.
The shares were sold to a wide variety of investors, including individuals, governments, and banks. The company was very successful, and its shares were traded on the Amsterdam Stock Exchange, giving investors an opportunity to buy and sell shares in the company.
The success of the Dutch East India Company’s IPO led to the emergence of other companies offering public shares, such as the first British East India Company in 1612.
IPOs have been known for bullish momentum and negative returns in issuance over the years. Individual sectors also experience ups and downs in issuance as a result of innovation and other economic factors. As startups without revenues rushed to list themselves on the stock market at the peak of the tech bubble, tech IPOs magnified.
A year with the fewest IPOs ever was caused by the financial crisis of 2008. Following the 2008 financial crisis, IPOs came to a halt, and new listings were scarce for several years. Recently, much of the IPO buzz has shifted to so-called unicorns—startup companies with private valuations of more than $1 billion.
What is the IPO Process?
It is a complex process that involves many steps, including filing with the SEC, setting the offering price, and marketing the IPO. The process typically begins with a company filing a registration statement with the SEC that provides investors with basic information about the company and its finances.
The company will then work with an investment bank to set the offering price for the shares. Once the offering price is set, the company will create a marketing plan to promote the IPO.
Two Stages of the IPO Process
The IPO procedure is divided into two parts. The first is the offering's pre-marketing phase, and the second is the initial public offering itself. When a company decides to go public, it will either advertise to underwriters by soliciting private bids or make a public statement to generate interest.
The underwriters are chosen by the company to lead the IPO process. A company may select one or more underwriters to manage various aspects of the IPO process collaboratively. Underwriters participate in all aspects of the IPO, from documentation to filing and marketing.
Steps in the IPO Process
- Pre-IPO Planning: Companies and their advisors must determine the price range of the offering and the number of shares to be offered. They should also develop a comprehensive communication plan to ensure that all potential investors understand the offering.
- Registration Statement: Companies must submit a registration statement to the U.S. Securities and Exchange Commission (SEC), which contains all the details of the offering. The team shall also include accountants (CPAs) and
- Documentation: It is the process of preparing and submitting all required documents to the relevant regulatory bodies for review and approval. It includes the company's prospectus, registration statement, offering circular, and other legal documents that are necessary to meet the requirements of the relevant regulations. The documents must provide information about the company, its financial condition, and the terms of the offering in order to protect the interests of potential investors.
- Marketing: Underwriters and executives market the issuance of shares in order to estimate demand and set the final offering price. Throughout the marketing process, underwriters can make changes to their financial analysis. This includes the ability to change the IPO price or issuance date as they see fit. Companies take the necessary steps to meet the requirements for public share offerings. Companies must follow both the requirements for exchange listing and the SEC requirements for public companies.
- Setting the Offering Price: After the roadshow, the underwriters and the company set the final offering price and the number of shares to be offered.
- Allocation of Shares: The underwriters allocate the shares to different investors.
- Pricing: At the end of the day, the underwriters set the final offering price and announce it to the public.
- Closing: The underwriters, the company, and the SEC sign the final documents and the offering is officially closed.
- Trading: The newly-issued shares are listed on an exchange and they begin trading, usually the next day.
What is the Purpose of an Initial Public Offering?
IPOs are meant to provide capital to grow a business, increase public exposure, gain access to capital markets, and provide liquidity to existing shareholders.
The primary purpose of an IPO is to raise capital for the company. This can be used for a variety of purposes such as business expansion, funding research and development, or repaying debts. By issuing shares, the company gains access to a large pool of capital from the public that can be used to fund its operations.
An IPO also provides liquidity to existing shareholders, as they can now sell their shares on the stock market. This provides an exit strategy for early investors and can help the company attract new investors by providing an attractive return on investment.
By becoming publicly traded, the company is more likely to be taken seriously by potential partners and customers, as it is now backed by a large number of investors.
Overall, introducing an IPO is an important event that can help a company raise capital, increase liquidity, and boost its credibility.
Advantages and Disadvantages of an IPO
An IPO can also provide a company with increased visibility and potential for further growth. Also, companies may also benefit from increased liquidity, as the availability of shares on the public market allows for more efficient trading.
However, despite the benefits, it carries some risks which we must be aware of. Let’s learn about the advantages and disadvantages in this part.
Advantages of an IPO
- Raise capital Growth: Initial Public Offering (IPO) allows a company to raise capital for growth and development. This allows a company to expand operations, develop new products and services, and increase its market share.
- Increases Visibility: IPO can also increase the company’s visibility and help it to gain credibility in the market. The company’s name, brand, and logo will be exposed to a much wider audience, which can be beneficial in terms of customer acquisition and sales.
- Liquidity: Lastly, an IPO allows the company’s founders and early investors to cash out some of their shares. This can be beneficial in terms of providing liquidity to the investors and also allowing them to diversify their portfolios.
- Leadership Discipline: Making it public encourages managers to prioritize profit over other goals like growth or expansion. It also makes it easier to communicate with shareholders because they can't hide their problems.
- Third-Party Viewpoint: When a company goes public, it gains an objective viewpoint on its business model, marketing strategy, and other factors that may impede its ability to become lucrative.
Disadvantages of an IPO
- High Costs: An IPO can be expensive for a business as there are numerous financial and legal costs associated with the process. Companies need to pay for lawyers, underwriters, and other professionals to help them with the process.
- Risk of Failure: An IPO is a high-risk venture for a business. If the stock does not perform well on the market, then it can be difficult to attract investors, resulting in financial losses.
- Loss of Control: When a company goes public, it means that it is no longer privately owned. This can lead to a loss of control, as the business is now answerable to shareholders and subject to the rules and regulations of the stock exchange.
IPO Alternatives to Watchout for
In this part, we shall learn about some of the prominent alternatives to an IPO.
- Direct Public Offerings (DPOs)
- Regulation A+ Offerings
- Private Equity Offerings
- Regulation Crowdfunding Offerings
- Mergers and Acquisitions
- Private Placement Offerings
- Initial Exchange Offerings (IEOs)
- Security Token Offerings (STOs)
- Reverse Mergers
- Secondary Offerings
An alternative to an IPO should be considered when an entrepreneur is not looking to raise capital or is not interested in the long-term commitment and costs associated with an IPO. A direct listing is often more cost-effective, since there are no underwriting fees, and it can provide a more direct route to a public listing.
A SPAC is another alternative that can provide a more streamlined process for going public since the SPAC has already gone through the IPO process. Finally, a reverse merger can also be a cost-effective way to go public as it involves a private company merging with a public shell company, which eliminates the need for a full IPO. However, it is important to consider the risks associated with this type of transaction, such as the potential for fraud.
Some IPO questions that are commonly asked are included in this part of the article:
Q: Are IPOs for anyone who wants to invest in them?
A: We must know that a new IPO will frequently have more demand than supply. As a result, there is no guarantee that all interested investors will be able to purchase shares in an IPO.
Those interested in participating in an IPO may be able to do so through their brokerage firm, though access to an IPO may be limited to a firm's larger clients in some cases. Another option is to invest in an IPO-focused mutual fund or another investment vehicle.
Q: Is an initial public offering a good investment?
A: An IPO can be a good investment if the company is strong and has a good track record. However, it also carries a significant amount of risk, as the stock price of a newly public company is often volatile and can decline significantly in a short amount of time.
While an IPO can be a great way to get in on the ground floor of a rapidly growing company, there is no guarantee of success. Additionally, an investor may be subject to a long lock-up period where they cannot sell their shares, and the stock price may be volatile during the first few months of trading.
For these reasons, it's important for investors to research the company, understand the potential risks, and make an informed decision before investing in an IPO.
Q: How Is an IPO priced?
A: An IPO is typically priced through a combination of market demand and the company's own valuation. The company's underwriters will conduct a process of gauging market demand for the company's stock and then setting a price range for the stock.
The company's management will then review the range and make a decision to set the final price. The range and final price are generally based on the value of the company's assets, the strength of its balance sheet, and the potential for future growth and profitability.
Q: What is the purpose of an initial public offering?
A: An initial public offering (IPO) is the process by which a privately held company's shares are made available for sale to the public. The purpose of an IPO is to raise capital for the company, increase its liquidity, create a public market for its shares, and create additional exposure for the company.
Through the IPO process, a company can gain access to new sources of capital, improve its ability to acquire other companies, and ultimately increase its value.
The Initial Public Offering (IPO) process is an important step for a company to raise capital and expand its business. It is a complex process that takes time and a great deal of preparation to ensure success. By understanding the IPO process, companies can make the most of their offering and maximize the potential for success.
With the right guidance, the IPO process can be a rewarding experience for the company and its investors.
How can Deskera Help You?
Deskera's unified financial planning tools help investors plan and track their investments more effectively. It can help investors make more accurate and timely decisions.
Deskera Books can assist you in automating your accounting and lowering business risks. Deskera automates many other processes, including invoice creation, reducing the administrative workload of your team.
Deskera also offers integrated applications to help businesses manage their finances, inventory, and operations. Deskera also provides HR (Deskera People), CRM (Deskera CRM), and Enterprise Resource Planning (Deskera ERP).
These could be extremely beneficial in helping short sellers stay on top of their businesses and make better decisions.
- An Initial Public Offering (IPO) is the process of a company issuing shares of stock to the public for the first time.
- It is a way for a company to raise capital to fund its operations or expand its business.
- The first modern IPO was conducted by the Dutch East India Company in 1602.
- It is a complex process that involves many steps, including filing with the SEC, setting the offering price, and marketing the IPO.
- The process typically begins with a company filing a registration statement with the SEC that provides investors with basic information about the company and its finances.
- The primary purpose of an IPO is to raise capital for the company. This can be used for a variety of purposes such as business expansion, funding research and development, or repaying debts.
- IPOs help the companies raise capital growth and increase visibility.
- Risks of failure is one of the top disadvantages of an IPO.
- Direct Public Offerings (DPOs), Regulation A+ Offerings, and Private Equity Offerings are some of the many alternatives to an IPO.