Initial Public Offering Basics, Benefits & Requirements

An Initial Public Offering (IPO) is a vehicle for a privately held company to go public. It usually ends up as seminal event in the company’s history. The company starts off by issuing a specific number of share certificates at a specific price to investors. Once it gets listed on a specific stock market, the company’s shares can be bought and sold by individual investors.

It is an extremely complicated process with a maze of regulatory and compliance requirements. But the benefits, in terms of finance, are just as high. A successful and well-subscribed IPO can instantly turn a small regional company into an international corporate heavyweight.

The sudden influx of capital with no strings attached helps keep the company’s current business on track, and puts its growth plans on a high-speed track. Liquidity problems which can derail a company’s existence disappear, and lenders can be paid off in full. The business also gets a boost from all the hype over the IPO and customers and business partners will start looking at the company with greater trust.

The way an IPO works is that the SEC needs the company to file a registration statement along with a prospectus detailing every aspect of the company and its business. The prospectus will also include the company’s post-IPO plans and how the company plans to utilize the funds.

The underwriters will not only assist with the filing requirements, but also the change in the company’s structure. This means they assist in the transition from a private run enterprise to a public company with a board and stockholders. But their main job is to help decide the specifics of the IPO – the pricing, the number of shares and the market.

There are also changes in the way the company operates post IPO. Disclosures are mandatory, and the company has to file SEC statements and publish quarterly financial results. There’s also the AGM where the company has to answer to stockholders and important decisions about the direction of the company and its management are put to a vote. This is one big reason why companies hire new executives after an IPO, since there is a need for management who know how to run a public company.

The success of a public offering largely depends on the growth potential of the company and its sector, and whether or not the business has sound basics and a revenue model. But many IPO’s have failed inspite of having all this. It may be because they didn’t choose the right market or the right price, or chose the wrong time to go public.

As an example, consider Canada, where an IPO won’t be able to reach the size or price that an offering in the US markets can fetch. The Canadian market has a significantly lower threshold for risk. In Europe, there are even more issues that need to be considered, like the economic conditions in each member state of the EU which affect every market in Europe.

During the dot-com era, anyone with a website willing to fulfill the regulatory requirements could launch an Initial Public Offering and become an overnight millionaire. Things are different now, and investors are looking for a safe bet with long-term potential. The process of getting listed as a publicly traded company is long and hard, but the flood of money that accompanies a successful IPO is well worth the effort.

In order to grow and expand, many companies will go through the IPO How process and make an Initial Public Offering (IPO) to the general public. A new IPO Prospectus valuation is usually made, and Canadian IPOs are becoming more common nowadays.