IPO or Initial Public Offering refers to the first stock sale made by a private organization to the public. This move is typically used by small companies that require funds in order to expand operations, but it is not uncommon for larger companies either especially those that wish to reach the public.
The process is simple enough. In an IPO, the issuer gets aid from an underwriting company in determining whether it should issue a preferred or a common security along with the best price and the time it should be introduced into the market.
Issuing shares via IPO is one of the main reasons the stock market exists. It allows companies to increase capital so that they can expand operations, allow investors to cash out or create common stock to get rivals. They can also sell some of the shares later if they wish to. This is known as the primary market and it occurs when an investor purchases stock straight from a company.
However, a secondary market is more common and it occurs when several investors make trades between themselves using shares they acquired from a company.
How a Company goes Public
Getting a company through to its Initial Public Offering takes a lot of time and money. Besides overcoming regulations, the company has to contend with public scrutiny along with the oversight of the SEC or Securities and Exchange Commission.
If you wish to take your company public then it would be best to hire an underwriter to help you through the process along with services from an investment banking company that can take care of most of the grunt work. The result will be a preliminary prospectus which you can present to investors and the SEC.
This is called a ‘red herring’ in the stock market and this will be your final prospectus or the final legal document that can facilitate the IPO process. One of the most important documents in this is the S-1 form which is basically the legal registration statement. A well made prospectus will outline what your company does, why it is issuing shares via an Initial Public Offering and the type of ownership on offer to investors in clear terms.
Further Reading
- Initial public offerings: International insights – www.sciencedirect.com [PDF]
- The economic determinants of auditor compensation in the initial public offerings market – www.jstor.org [PDF]
- Empirical analysis of the economic demand for auditing in the initial public offerings market – www.jstor.org [PDF]
- Pricing initial public offerings: Further evidence from Germany – www.sciencedirect.com [PDF]
- Underperformance in long-run stock returns following seasoned equity offerings – www.sciencedirect.com [PDF]
- Underpricing, ownership and control in initial public offerings of equity securities in the UK – www.sciencedirect.com [PDF]
- Earnings quality at initial public offerings – www.sciencedirect.com [PDF]
- Technological innovation and initial public offerings – academic.oup.com [PDF]
- Artificial neural network models for pricing initial public offerings – onlinelibrary.wiley.com [PDF]
- Unit initial public offerings: A form of staged financing – www.sciencedirect.com [PDF]
