When an unlisted private company (which is not a listed company on the stock exchange market), for the first time, states Initial Public Offering (IPO) when it decides to start raising funds through the sale of shares to the public.
Why does a Private Company go Public through IPO?
Here are a few reasons mentioned why a company goes public through Initial Public Offering (IPO):
1. For Expanding and Growth Of The Company By Raising Capital
Every company needs financial support or money to grow and expand the company. To grow and expand a company, a company needs to create new products and launch them to the public, offer the best services to the consumers, and pay off debts they have taken in the past. For all this company requires money.
2. Owners and Early Investors Can Sell Their Stake For Making Money
So, selling the stake and making money is one thing, but it is also a kind of exit strategy for venture capitalists and initial investors. A company that starts selling stocks for the first time on the stock exchange becomes liquid by the sale of the stocks. To gain profits and a good chance to exit the company, the venture capitalists at this time sell their stock to the company.
3. Higher Public Awareness
There’s a point that Initial Public Offering (IPO) has a star mark in the stock market calendar. At these events, there’s a lot of publicity. So, private companies see this as a great opportunity to grow their company by making publicity of their products and services. The public also looks for new companies and their best products and services.
So, this is a great opportunity for private companies to grow financially and attract new customers.
Types of IPO
There are two types of Initial Public Offerings (IPO): Fixed Price issues and Book Building issues.
1. Fixed Price Issue
A Fixed Price issue is where the price of the shares is fixed, and all the applications and allocations are fixed at this price. This is a common stock market terminology. If you are a beginner then you can join a stock market institute to learn these.
2. Book Building Issue
Here, the Book Building Issue does not have a fixed price as a fixed price issue, but it has a price range which is the upper price, lower price, or equal to the floor prices.
How does an IPO Work?
A private company that is not registered on the stock exchange has few shareholders, including the founders of the company, their family members, relatives, and some of their friends.
An Initial Public Offering is one of the great opportunities for the companies to raise a lot of money. This opportunity of IPO gives the private companies a big chance to grow and expand their company. One more important point is that the transparency and credibility of share listing can also help to obtain better terms.
So when a company is capable of the rigors of SEC regulations and the responsibilities and benefits to public shareholders, it will start taking the company to sell its shares to the public. But only companies with proven potential and capabilities can qualify for an Initial Public Offering (IPO).
It depends upon the competition in the market and the capability of the companies to meet the listing requirements. When a company goes public, its shares in IPO are priced by underwriting due diligence.
Due diligence means that the underwriter takes some steps to see and ensure that all the information is included in the prospectus and investigates and verifies some key material facts which the issuer provides for inclusion in the prospectus.
In IPO, the private shares of ownership which were previously owned coverts to public ownership, and the existing private shareholder’s shares in the company become worthy public trading prices as the company goes public.
At this time, the market opens to the public an opportunity for many investors to buy shares in the company and contribute their capital to the company’s equity of shareholders.
History Of Initial Public Offerings (IPO)
Initial Public Offerings (IPO) started in Dutch when the first modern IPO offered the shares of the Dutch East India Company to the public. From this point, the use of IPOs started.
Companies see the IPO as an opportunity to raise their capital through public investors and grow their companies. Years passed, and IPOs have many uptrends and downtrends in issuance. Many new startups came into the market without revenues to list themselves on the stock market.
But a time came when the financial crisis came in 2008, which decreased the number of IPOs. After this, IPOs halted for some years. In these years, listings of companies were rare.
Now, these years’ IPO buzz focused on startup companies that have reached valuations of more than one billion dollars, and these startup companies are called unicorns.
The Process Of Initial Public Offering (IPO)
The first main thing that starts the process of IPOs is to choose underwriters. A company can select one or more underwriters. Underwriters lead the process of Initial Public Offering (IPO) like IPO due diligence, filing, issuance, documentation preparation, and marketing.
1. Proposals And Choosing Underwriters
Underwriters present proposals for discussing their services, like offering price, estimated time frame for the offering of the market, type of security to issue, and amount of shares.
Choosing underwriters is necessary as they are the one who leads the whole IPO process like documentation preparation, filing, issuance, IPO due diligence, and marketing. The company is responsible for selecting underwriters. The company formally agrees to the terms and conditions of the underwriters through an agreement of underwriting.
2. Forming Of Team
Initial Public Offerings (IPO) teams are formed consisting of underwriters, Securities and Exchange Commission (SEC) experts, Lawyers, and authorized public accountants (CPAs).
Documentation of the IPO requires information about the corporate. The first IPO filing document is the S-1 registration statement. The S-1 registration statement has two parts: prospectus and the privately held filing of information.
4. Marketing and Updates
Marketing strategy and materials are created for pre-marketing the new stock issuance. The issuance of the shares by the underwriters and market executives is to estimate the demand for the stock and establish the ultimate offering price.
Underwriters can change the IPO price and issue dates throughout the marketing process. They can also make financial analysis revisions throughout the marketing process.
5. Issued Shares
On the date of the Initial Public Offering (IPO) company issues its shares. Capital received from the first issuance to the shareholders is received in cash and recorded on the balance sheet as stockholder’s equity. So, the share value of the record depends on the stockholders of the company’s equity per share valuation.
Advantages and Disadvantages of IPO
Advantages Of IPO
- Companies get a plus in this that they get access to speculate from the complete public investing in stocks to boost their capital.
- The increase in transparency helps companies gain the investors’ trust and receive more favorable borrowing terms of credit than any private company.
- In the future, companies can raise additional funds through secondary offerings. Taking an organization to the public through IPO makes good publicity for the company, which attracts the public to the company. As companies can show their products and services to the public more widely.
- Companies can raise more capital faster to support themselves financially to grow and expand the company.
Disadvantages Of IPO
- IPOs are very expensive. Companies have to pay a lot for legal work, accounting, marketing, etc.
- The process of Initial Public Offering (IPO) is extremely lengthy and it’s time-consuming process.
IPOs are one of the most talked-about topics in today’s time. Everybody wants to know and invest in IPOs, so I hope this article helped you. We tried to share every possible detail about the IPO.