What is an IPO?

Growing companies wanting to expand have two main options for raising capital, debt capital and equity capital. The seeking of equity capital entails the selling of shares, or equity in the company, to investors. This can come in two forms: selling to select investors in private or selling shares to the public on the stock market. Going public raises by far the largest sums of money for a company, and thus, many companies eventually choose to go this route. When a private company first decides it wants to sell its shares to the public, it begins a process known as an IPO, or initial public offering.

The IPO Process

In most cases, the company seeking capital does not bear the large responsibility of issuing an IPO on its own. Most companies enlist the help of an investment bank as an underwriter. The investment bank chosen as the underwriter is tasked with creating a team consisting of lawyers, certified public accountants, and Securities and Exchange Commission experts. This team compiles information regarding the company, including financial performance and expected future operations in order to write a prospectus, a legally required document filed with the Securities and Exchange Commission detailing an investment offering for sale to the public.

Prospectus

A preliminary prospectus is first provided by the security issuer, the company seeking capital, and includes details of the business and impending transaction. A final prospectus is then issued after the deal has been made effective, providing information regarding the exact number of shares issued and the precise offering price.

The prospectus details the number of shares available, how much the underwriters are earning per sale, the company’s financial information, and whether the SEC has approved the prospectus. Because investments come with risks, a prospectus also serves as a way to inform investors about these risks. The provided information guards the issuing company against claims that critical information was not detailed prior to an investor putting money into a security.

Completion of the IPO Process

Once the financial statements of a company are pass a final audit, the company files its prospectus with the SEC and sets a date for the offering.

Pros and Cons of an IPO

Pros

By far, an IPO raises the greatest amount of money for a company compared to other options. Additionally, a large, diverse group of investors has access to the company’s shares. An IPO can also increase the company’s exposure and public image.

Cons

A public company is required to disclose financial, accounting, tax, and other business information, a responsibility not required of private companies. The management also needs to be more attentive of certain aspects of the company for reporting to the public. New shareholders are also able to control the company through the board of directors.