What Is an IPO?

An IPO, or initial public offering, is the term for the first time that a 澳洲幸运5官方开奖结果体彩网:private company sells shares of its stock to the public⛎ on a stock exchange. The event means that the company has transitioned from private to public ownership, which is why an IPO is often referred to as "going public." It's an opportunity for a company to raise significant capital—to help it fund new growth, for example, or pay off debt. And it allows private investors, like founders, angel investors, and family members, to cash out, often realizing gains on their investment.

An IPO doesn't just happen overnight. It's the culmination of a process during which an 澳洲幸运5官方开奖结果体彩网:underwriting investment bank or group of banks helps the company prepare for the IPO, files paperwork and financial disclosures with the 澳洲꧃幸运5官方开奖结果体彩网:Securities and Exchange Commission (SE🍎C), creates a draft prospectus, takes it on a 澳洲幸运5官方开奖结果体彩网:road show to drum up interest, and much more.

How an Initial Public Offering (IPO) Works

Before an IPO, a company is considered private. As a pre-IPO private company, the business has grown with a relatively small number of shareholders including early investors like the founders, family, and friends along with professional investors such as 澳洲幸运5官方开奖结果体彩网:venture capitalists or 澳洲幸运5官方开奖结果体彩网:angel investors.

An IPO is a big step for a company as it provides the company with access♔ to ꦫraising a lot of money. This gives the company a greater ability to grow and expand. The increased transparency and share listing credibility can also be a factor in helping it obtain better terms when seeking borrowed funds as well.

When a company reaches a stage in its growth process where it believes it is mature enough for the rigors of SEC regulations along with the benefits and responsibilities to public 澳洲幸运5官方开奖结果体彩网:shareholders, it will begin to advertise its intere🍃st in going public.

Typically, this stage of growth will occur when a company has reached a private valuation of approximately $1 billion, also known as 澳洲幸运5官方开奖结果体彩网:unicorn status. However, private companies at various valuations with strong fundamentals and proꦇven profitability pote﷽ntial can also qualify for an IPO, depending on the market competition and their ability to meet listing requirements.

IPO shares of a company are priced through underwriting 澳洲幸运5官方开奖结果体彩网:due diligence. When a company goes public, the previously owned private share ownership converts to public ownership, and the existing private shareholders’ shares become worth t𓃲he public trading price. Share underwriting can also include special provisions for private to public share ownership.

Meanwhile, the public market opens up a huge opportunity for millions of investors to buy shares in the company and contribute capital to a company’s shareholders' equity. The public consists of any individual or institutional investor who 🔯is interested in 𒊎investing in the company.

Overall, the number of shares the company sells and the price for which shares sell are the generating factors for the company’s new shareholders' equity value. Shareholders' equity still represents shares owned by investors when it is both private and public, but with an IPO, the shareholders' equity increases significantly with cash from the primary issuance.

History of IPOs

The term 澳洲幸运5官方开奖结果体彩网:initial public offering (IPO) has been a buzzword on Wall Street and among investors for decades. The Dutch are credited with conducting the 澳洲幸运5官方开奖结果体彩网:first modern IPO by offering shares of the 澳洲幸运5官方开奖结果体彩网:Dutch East India Company to the general public.

Si🙈nce then, IPOs have been used as a way for companies to raise capital from pu♋blic investors through the issuance of public share ownership.

Through the years, IPOs have been known for uptrends and downtrends in issuance. Individual sectors also experience uptrends and downtrends in issuance due to innovation and various other economic factors. Tech IPOs multiplied at the height of the 澳洲幸运5官方开奖结果体彩网:dotcom boom as startups without revenues rushed to list themselves on the stock ma🌟rket.

The 2008 financial crisis resulted in a year with the least number of IPOs. After the recession following the 2008 澳洲幸运5官方开奖结果体彩网:financial crisis, IPOs ground to a halt, and for some years after, new listings were rare. More recently, much of the IPO buzz has moved to a focus on so-called unicorns—startup companies that have reached private valuations of more than $1 billion. Investors and the media heavily speculate on these companies and their decision to go public via an 💜IPO or stay pr𝄹ivate.

What Is the IPO Process?

澳洲幸运5官方开奖结果体彩网:The IPO process essentially consists of two parts. The first is the pre-marketing phase of the offering, while the second is the initial public offering itself. When a company is interested in an IPO, it will advertise to underwriters by soliciting private bids or it can also make a 澳洲幸运5官方开奖结果体彩网:public statement to generate interest.

The 澳洲幸运5官方开奖结果体彩网:underwriters lead the IPO process and are chosen by the company. A company may choose one or several underwriters to manage different parts of the IPO process collaboratively. The underwriters are involved in every aspect of the IPO 澳洲幸运5官方开奖结果体彩网:due diligence, document preparation, filing, marketinཧg, and issuance.

Steps to an IPO

1. Proposals. Underwriters present proposals and valuations discussing their services, the best type of security to issue, 澳洲幸运5官方开奖结果体彩网:offering price, amount of shares, and estimated time frame for the market offering.
2. Underwriter. The company chooses its underwriters and formally agrees to underwrite terms through an underwriting agreement.
3. Team. IPO teams are formed comprising underwriters, lawyers, 澳洲幸运5官方开奖结果体彩网:certified public accountants (CPAs), and 澳洲幸运5官方开奖结果体彩网:Securities and Exchange Commission (SEC) experts.
4. Documentation. Information regarding the company is compiled for required IPO documentation. The S-1 Registration Statement is the primary IPO filing document. It has two parts—the prospectus and the privately held filing information. The S-1 includes preliminary information about the expected date of the filing. It will be revised often throughout the pre-IPO process. The included prospectus is also revised continuously.
5. Marketing & Updates. Marketing materials are created for pre-marketing of the new stock issuance. Underwriters and executives market the share issuance to estimate demand and establish a final offering price. Underwriters can make revisions to their financial analysis throughout the marketing process. This can include changing the IPO price or issuance date as they see fit. Companies take the necessary steps to meet specific public share offering requirements. Companies must adhere to both exchange listing requirements and SEC requirements for public companies.
6. Board & Processes. Form a 澳洲幸运5官方开奖结果体彩网:board of directors and ensure processes for reporting auditable financial and accounting information every quarter.
7. Shares Issued. The company issues its shares on an IPO date. Capital from the primary issuance to shareholders is received as cash and recorded as stockholders' equity on the balance sheet. Subsequently, the balance sheet share value becomes dependent on the company’s stockholders' equity per share valuation comprehensively.
8. Post IPO. Some post-IPO provisions may be instituted. Underwriters may have a specified time frame to buy an additional amount of shares after the initial public offering (IPO) date. Meanwhile, certain investors may be subject to 澳洲幸运5官方开奖结果体彩网:quiet periods.

Advantages and Disadvantages of an IPO

The primary objective of an IPO is to raise capital for a business. It can also come with other advantages as ꦑwell as disadvantages.

Advantages

One of the key advantages is that the company gets access to investment from the entire investing public to raise capital. This facilitates easier acquisition deals (share conversions) and increases the company’s exposure, prestige, and public image, which can help 🔜the company’s sales♊ and profits.

Increased transparency that comes with required quarterly reporting can usually help a company receive more favorable credit borrowing terms than a private company. 

Disadvantages

Companies may confront several disadvantages to going public and potentially 𝕴choose alternative strategies. Some of the major disadvantages include the ꦇfact that IPOs are expensive, and the costs of maintaining a public company are ongoing and usually unrelated to the other costs of doing business.

Fluctuations in a company's share price can be a distraction for management, which may be compensated and evaluated based on stock performance rather than real financial results. Additionally, the company becomes required to disclose financial, accounting, tax, and other business information. During these disclosures, it may have to publicly reveal secrets and business methods that could help competitors.

Rigid leadership and 澳洲幸运5官方开奖结果体彩网:governance by the board of directors can make it more difficult to retain good managers willing to take risks. 澳洲幸运5官方开奖𒊎结果体彩网:Remaining private is always an option. Instead of going public, companies🅷 may also solജicit bids for a buyout. Additionally, there can be some alternatives that companies may explore.

IPO Alternatives

Direct Listing

A direct listing is when an 澳洲幸运5官方开ꦐ奖结果体彩网:IPO is conducted without any underwriters. Direct listings skip the underwriting process, which means the issuer has more risk if the offering does not do well, but issuers also may benefit from a higher share price. A direct offering is usually only feasible for a company with a well-known brand and an attractive business.

Dutch Auction

In a 澳洲幸运5官方开奖结果体彩网:Dutch auction, an IPO price is not set. Potential buyers can bid for the shares they want and the price they are willing to pay. The bidders who were willing to pay the hig♈hest price are then allocate🐎d the shares available.

Investing in an IPO

When a company decides to raise money via an IPO it is only after careful consideration and analysis that this particular 澳洲幸运5官方开奖结果体彩网:exit strategy will 澳洲幸运5官方开奖结果体彩网:maximize the 👍returns of early investors and raise the most capi🐬tal for the business. Therefore, when the IPO decision is reached, the prospects for future growth are likely to be high, and many public investors will line up to get their hands on some shares for the first time. IPOs are usually discounted to ensure sales, which makes them even more attractive, especially when they generate a lot of buyers from the primary issuance.

Initially, the price of the IPO is usually set by the underwriters through their pre-marketing process. At its core, the IPO price is based on the valuation of the company using fundamental techniques. The most common technique used is 澳洲幸运5官方开奖结果体彩网:discounted cash flow, which is the 澳洲幸运5官方开奖结果体彩网:net present value of the company’s expected future cash flows.

Underwriters and interested investors look at this value on a per-share basis. Other methods that may be used for setting the price include equity value, 澳洲幸运5官方开奖结果体彩网:enterprise value, compar🍒able firm adjustments, and more. The underwriters do factor in demand but they also tyℱpically discount the price to ensure success on the IPO day.

It can be quite hard to analyze the 澳洲幸运5官方开奖结果体彩网:fundamentals and 澳洲幸运5官方开奖结果体彩网:technicals of an IPO issuance. Investors will watch news headlines but the main source for information should be the 澳洲幸运5官方开奖结果体彩网:prospectus, which is available as soon as the company files its S-1 Registration. The prospectus provides a lot of useful information. Investors should pay special attention to the managemeꦯnt team and their commentary as well as the quality of the underwriters and the specifics of the deal. Successful IPOs will typically be supported by big investment banks that can promote a new issue well.

Overall, the road to an IPO is a very long one. As suc🌜h, public investors building interest can follow developing headlines and other information along the way to help supplement th💙eir assessment of the best and potential offering price.

The pre-marketing process typically includes demand from large private accredited investors and institutiona♛l investors, which heavily influence the IPO’s trading on its opening day. Investors in the public don’t become involved until the final offering day. All investors can participate but individual investors specifically must have trading access in place. The most common way for an individual investor to get shares is to have an account with a brokerage platform that itself has received an allocation and wishes to share it with its clients.

Performance of IPOs

Several factors may affect the return from an IPO which is often 澳洲幸运5官方开奖结果体彩网:closely watched by investors. Some IPOs may be overly hyped by investment banks🏅 which can lead to initial losses. However, the majority of IPOs are known for ꧙gaining in short-term trading as they become introduced to the public. There are a few key considerations for IPO performance.

Lock-Up

If you look at the charts following many IPOs, you'll notice that after a few months the stock takes a steep downturn. This is often because of the expiration of the 澳洲幸运5官方开奖结果体彩网:lock-up period. When a compan🍃y goes public, the underwriters make company insiders,𝕴 such as officials and employees, sign a lock-up agreement.

Lock-up agreements are legally binding contracts between the underwriters and insiders of the company, prohibiting them from selling any shares of stock for a specified period. The period can range anywhere from three to 24 months. Ninety days is the minimum period stated under Rule 144 (SEC law) but the lock-up specified by the underwriters can last much longer. The problem is, when lockups expire, all the insiders are permitted to sell their stock. The result is a rush of people trying to sell their stock to realize t𓃲heir profit. This excess supply can put severe downward pressure on the stock price.

Waiting Periods

Some investment banks include waiting periods ▨in ♒their offering terms. This sets aside some shares for purchase after a specific period. The price may increase if this allocation is bought by the underwriters and decrease if not.

Flipping

Flipping is the practice of reselling an IPO stock in the first few days to earn a quick pr꧒ofit. It is common when the s𝔉tock is discounted and soars on its first day of trading.

Tracking IPO Stocks

Closely related to a traditional IPO is when an existing company spins off a part of the business as its standalone entity, creating 澳洲幸运5官方开奖结果体彩网:tracking stocks. The rationale behind 澳洲幸运5官方开奖结果体彩网:spin-offs and the creation of tracking stocks is that, in some cases, individual divisions of a company can be worth more separately than as a whole. For example, if a division has high growth potential but large current losses within an otherwise slowly growing company, it may be 澳洲幸运5官方开奖结果体彩网:worthwhile to carve it out and keep the parent company as a large✨ shareholder, then let it raise additional capital from an IPO.

From an investor’s perspective, these can be interesting IPO opportunities. In general, a sꦐpin-off of an existing company provides investors with a lot of information about the parent company and its stake in the divesting company. More information available for potential investors is usually better than less so savvy investors may find good opportunities in this type of scenario. Spin-offs can usually experience less initial volatili👍ty because investors have more awareness.

The Bottom Line

A company that has an IPO and transitions from being privately owned to being publicly owned is taking a giant step forward. The moneyꦦ it raises can help fuel its growth, pay off early investors and debt, and allow for investment in research and development. But for investors, the IPO is no guarantee of future success, and it may take many years for that investment to pay off.