An IPO, or initial public offering, is when a private company offers its shares to the public for the first time. This allows the company to raise capital from public investors.
Moving from a private to a public company is a crucial moment for private investors to maximize their gains, often involving a share premium. At the same time, it gives public investors a chance to get involved in the opportunity.
How an Initial Public Offering Works?
Prior to an IPO, a company is regarded as private. As a private company preparing for an IPO, the business has expanded with a limited number of shareholders, including the founders, family, friends, and professional investors like venture capitalists or angel investors.
Going public through an IPO is a significant milestone for a company as it allows them to raise a substantial amount of money. This enables the company to enhance its growth and expansion opportunities. Moreover, the improved transparency and credibility gained from being listed on the stock market can also contribute to obtaining more favorable terms when seeking loans.
Once a company feels it is ready to comply with SEC regulations and take on the responsibilities of being a public company, it will start showing its intention to go public.
Usually, this growth phase happens when a company achieves a private valuation of around $1 billion, which is commonly referred to as unicorn status. Nevertheless, private companies with different valuations, but with solid fundamentals and proven potential for profitability, can also be eligible for an IPO. This eligibility depends on market competition and their capability to fulfill the listing requirements.
Underwriting due diligence determines the price of IPO shares for a company. When a company becomes public, the private shares owned by individuals convert to public ownership, and their value is determined by the public trading price. Share underwriting may also involve specific provisions for transitioning from private to public share ownership.
The public market provides a great chance for many investors to purchase company shares and add funds to the company’s shareholders’ equity. It includes both individual and institutional investors keen on investing in the company.
The company’s new shareholders’ equity value is determined by the number of shares sold and the selling price. Shareholders’ equity includes shares owned by investors in both private and public companies, but with an IPO, the equity grows substantially due to cash from the initial offering.
What Is the Initial Public Offering Process?
The IPO process can be divided into two parts. The first part is the pre-marketing phase, and the second part is the actual initial public offering. When a company wants to go public, it can either reach out to underwriters privately or make a public announcement to attract interest.
The company selects the underwriters to oversee the IPO process. They can choose one or multiple underwriters to handle different aspects of the IPO process together. The underwriters play a role in all stages of the IPO, including due diligence, preparing documents, filing, marketing, and issuing.
Conclusion
IPO marks a significant milestone in a company’s growth journey, offering opportunities for capital raising, increased public awareness, and enhanced credibility. For investors, IPOs present a chance to invest in potentially high-growth companies from their early stages in the public market. However, it’s crucial to approach IPO investments with caution, as they come with risks, including market volatility and the possibility of the company not meeting performance expectations. By understanding the IPO process, the motivations behind it, and the risks involved, both companies and investors can make informed decisions that align with their financial goals.