business plan initial public offering

What Is An IPO?

Updated: Jan 26, 2024, 5:53pm

An IPO is an initial public offering. In an IPO, a privately owned company lists its shares on a stock exchange, making them available for purchase by the general public.

Many people think of IPOs as big money-making opportunities—high-profile companies grab headlines with huge share price gains when they go public. But while they’re undeniably trendy, you need to understand that IPOs are very risky investments, delivering inconsistent returns over the longer term.

How Does an IPO Work?

Going public is a challenging, time-consuming process that’s difficult for most companies to navigate alone. A private company planning an IPO needs not only to prepare itself for an exponential increase in public scrutiny, but it also has to file a ton of paperwork and financial disclosures to meet the requirements of the Securities and Exchange Commission (SEC), which oversees public companies.

That’s why a private company that plans to go public hires an underwriter, usually an investment bank, to consult on the IPO and help it set an initial price for the offering. Underwriters help management prepare for an IPO, creating key documents for investors and scheduling meetings with potential investors, called roadshows.

“The underwriter puts together a syndicate of investment banking firms to ensure widespread distribution of the new IPO shares,” says Robert R. Johnson, Ph.D., chartered financial analyst ( CFA ) and professor of finance at the Heider College of Business at Creighton University. “Each investment banking firm in the syndicate will be responsible for distributing a portion of the shares.”

Once the company and its advisors have set an initial price for the IPO, the underwriter issues shares to investors and the company’s stock begins trading on a public stock exchange, like the New York Stock Exchange (NYSE) or the Nasdaq.

Why Do an IPO?

An IPO may be the first time the general public can buy shares in a company, but it’s important to understand that one of the purposes of an initial public offering is to let early investors in the company cash out their investments.

Think of an IPO as the end of one stage in a company’s life-cycle and the beginning of another—many of the original investors want to sell their stakes in a new venture or a start-up. Alternatively, investors in more established private companies that are going public also may want the opportunity to sell some or all of their shares

“The reality is that there’s a friends and family round, and there are some angel investors who came in first,” says Matt Chancey, a certified financial planner ( CFP ) in Tampa, Fla. “There’s a lot of private money—like Shark Tank-type money—that goes into a company before ultimately those companies go public.”

There are other reasons for a company to pursue an IPO, such as raising capital or boosting a company’s public profile:

• Companies can raise additional capital by selling shares to the public. The proceeds may be used to expand the business, fund research and development or pay off debt.
• Other avenues for raising capital, via venture capitalists, private investors or bank loans, may be too expensive.
• Going public in an IPO can provide companies with a huge amount of publicity.
• Companies may want the standing and gravitas that often come with being a public company, which may also help them secure better terms from lenders.

While going public might make it easier or cheaper for a company to raise capital, it complicates plenty of other matters. There are disclosure requirements, such as filing quarterly and annual financial reports. They must answer to shareholders, and there are reporting requirements for things like stock trading by senior executives or other moves, like selling assets or considering acquisitions.

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Key IPO Terms

Like everything in the world of investing, initial public offerings have their own special jargon. You’ll want to understand these key IPO terms:

• Common stock. Units of ownership in a public company that typically entitle holders to vote on company matters and receive company dividends . When going public, a company offers shares of common stock for sale.
• Issue price. The price at which shares of common stock will be sold to investors before an IPO company begins trading on public exchanges. Commonly referred to as the offering price.
• Lot size. The smallest number of shares you can bid for in an IPO. If you want to bid for more shares, you must bid in multiples of the lot size.
• Preliminary prospectus. A document created by the IPO company that discloses information about its business, strategy, historical financial statements, recent financial results and management. It has red lettering down the left side of the front cover and is sometimes called the “red herring.”
• Price band. The price range in which investors can bid for IPO shares, set by the company and the underwriter. It’s generally different for each category of investor. For example, qualified institutional buyers might have a different price band than retail investors like you.
• Underwriter. The investment bank that manages the offering for the issuing company. The underwriter generally determines the issue price, publicizes the IPO and assigns shares to investors.

SPACs and IPOs

Recent years have seen the rise of the special purpose acquisition company ( SPAC ), otherwise known as a “blank check company.” A SPAC raises money in an initial public offering with the sole aim of acquiring other companies.

Many well-known Wall Street investors leverage their established reputations to form SPACs, raise money and buy companies. But people who invest in a SPAC aren’t always informed which firms the blank check company intends to buy. Some disclose their intention to go after particular kinds of companies, while others leave their investors entirely in the dark.

“It’s giving your money to an entity that doesn’t own anything but tells you, ‘Trust me, I’ll only make good acquisitions with it,’” says George Gagliardi, a CFP in Lexington, Mass. “Like a baseball batter wearing a blindfold, you don’t know what’s coming at you.”

Many private companies choose to be acquired by SPACs to expedite the process of going public. As newly formed companies, SPACs don’t have long financial histories to disclose to the SEC. And many SPAC investors can recoup their money in full if a SPAC does not acquire a company within 24 months.

Upcoming IPOs

IPO activity hit record highs in 2021, thanks to the very strong stock market. But since early 2022, the market for initial offerings has been frozen solid. As of mid-2023, there are some faint stirrings of activity in the IPO markets, but analysts believe it will be next year before we see very many boldface debuts. Here are some of the more prominent upcoming IPOs :

How to Buy IPOs

Buying stock in an IPO isn’t as simple as just putting in your order for a certain number of shares. You’ll have to work with a brokerage that handles IPO orders—not all of them do.

“Typically you’d have to buy IPO stock through your stock broker, and on rare occasions, directly from the underwriter—i.e., knowing someone at the company or investment bank,” says Gregory Sichenzia, founding partner of Sichenzia Ross Ference, a New York City-based securities law firm.

Brokers like TD Ameritrade , Fidelity, Charles Schwab and E*TRADE may offer access to IPOs. At many firms, though, you’ll also need to meet certain eligibility requirements, such as a minimum account value or a certain number of trades transacted within a certain time frame.

Perhaps most importantly, even if your broker offers access and you’re eligible, you still might not be able to purchase the shares at the initial offering price. Everyday retail investors generally aren’t able to scoop up shares the instant an IPO stock starts trading, and by the time you can buy the price may be astronomically higher than the listed price. That means you may end up purchasing a stock for $50 a share that opened at $25, missing out on substantial early market gains.

To help combat this, platforms  like Robinhood and SoFi now enable retail investors to access certain IPO company shares at the initial offering price. You’ll still want to do you research before investing in a company at its IPO.

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Should You Invest in IPOs?

As with any type of investing, putting your money into an IPO carries risks—and there are arguably more risks with IPOs than buying the shares of established public companies. That’s because there’s less data available for private companies, so investors are making decisions with more unknown variables.

Despite all the stories you’ve read about people making bundles of money on IPOs, there are many more that go the other way. In fact, more than 60% of IPOs between 1975 and 2011 saw negative absolute returns after five years.

Take Lyft, the ride-share competitor to Uber. Lyft went public in March 2019 at $78.29 per share. The stock price dropped immediately, and within a year, it reached a low around $21. The stock price has recovered somewhat, and as of writing the price was above $57. But even if you had bought in when Lyft went public, you still wouldn’t have recouped your investment.

Other companies do well over time, but stumble out of the gate. Peloton was supposed to go public at $29 per share but opened in September 2019 at $25.24 and struggled for the first six months, hitting $19.72 in March 2020. It’s considered the third worst mega-IPO debut in history. (A mega-IPO, or Unicorn IPO, is an IPO of a company valued at more than $1 billion.) If you stuck with Peloton, you’d have seen its stock rise to $154.67 by February 12, 2021. The question is—would you have been able to hold on through Peloton’s lows to reach its Covid-19-induced highs?

“Just because a company goes public, it doesn’t necessarily mean it’s a good long-term investment,” says Chancey. Take Y2K’s most infamous victim, Pets.com, which went public, netting about $11 per share, only to have its price crater to $0.19 in less than 10 months due to massive overvaluation, high operating costs and the Dot Com market crash.

Conversely, a company might be a good investment but not at an inflated IPO price. “At the end of the day, you could buy the very best business in the world, but if you overpay for it by 10 times, it’s going to be really hard to get your capital back out of it,” Chancey says.

“Buying IPOs, for the majority of buyers, isn’t investing—it’s speculating, as many of the shares allocated in the IPO are flipped the first day,” says Gagliardi. “If you really like the stock and plan to hold it as a long-term investment, wait a few weeks or months when the frenzy has disappeared and the price has come down, and then buy it.”

A Diversified Approach to IPO Investing

If you’re interested in the exciting potential IPOs but would prefer a more diversified, lower risk approach, consider funds that offer exposure to IPOs and diversify their holdings by investing in hundreds of IPO companies. The Renaissance IPO ETF (IPO) and the First Trust US Equity Opportunities ETF (FPX), for example, have returned 18.35% and 13.92% since inception, respectively. The S&P 500, a major benchmark for the U.S. stock market, on the other hand, has seen average returns of about 10% for the past 100 years.

Yes, you may see slightly higher highs with IPO ETFs than with index funds, but you also may be in for a wild ride, even from one year to the next. According to Fidelity, between 2009 and 2018, one-year U.S. IPO returns hit a low of -9% in 2015 only to skyrocket to 44% in 2016. That’s why most financial advisors recommend you invest the bulk of your savings in low-cost index funds and allocate only a small portion, generally up to 10%, to more speculative investments, like chasing IPOs.

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Start » strategy, understanding the ipo process and how it works.

Transitioning from a private to a public company can raise substantial capital. Learn how an initial public offering works.

An initial public offering (IPO) refers to the first time a business sells new or existing securities on the stock market, known as “going public.” Selling shares to the public can boost your company’s image while lowering your equity and debt costs. It enables your startup investors to maximize their returns and can help your corporation expand and attract skilled employees.

However, the IPO process is lengthy, and companies must meet U.S. Securities and Exchange Commission (SEC) requirements. Explore the IPO timeline and the steps involved to understand your responsibilities before and after taking your business public.

Starting the IPO process

As a company grows and increases in value, it may make sense to take it public. Conducting a registered public offering has many advantages, but it also comes with new obligations. Investopedia wrote, “Typically, this stage of growth will occur when a company has reached a private valuation of approximately $1 billion, also known as unicorn status.” But this figure isn’t set in stone.

Corporations must meet initial listing standards for national securities exchanges. According to Investor.gov , “Initial listing standards generally include a company’s total market value and stock price, and the number of publicly traded shares and shareholders of the company.” The criteria vary by the exchange.

The SEC recommended that companies consider the following factors before beginning the IPO process:

• It costs money and takes time to achieve an IPO. Check out PwC's IPO cost calculator for more information.
• Public companies have additional responsibilities after going public. These duties include providing SEC and shareholder reports.
• Failure to meet your legal obligations can create liability issues for you and your company. Additionally, you must continue to meet exchange listing requirements.
• You will no longer manage your business alone, as shareholders will have a say. A board of directors will guide your company through most decisions.
• Your financial information will be available to the public. You must file annual and quarterly reports detailing your financial status and submit Form 8-K before making major announcements.

[ Read more: Employee Stock Options: How Can Your Small Business Offer Them? ]

Conducting a registered public offering has many advantages, but it also comes with new obligations.

Select one or more underwriters

Investment banks (underwriters) employ financial experts who specialize inIPOs. They assign a lead underwriter, called a book runner, to oversee the process and may assign co-managers to assist with other duties. Underwriters ensure due diligence by investigating every legal element and potential risk. In addition, they oversee every aspect of the IPO process, from document preparation to issuing stock.

Orrick suggested that businesses assess underwriters by:

• Determining if the underwriter understands your company.
• Considering their ability to tell your organization's story.
• Evaluating their reputation and experience.
• Examining the quality of the underwriting team.
• Reviewing the underwriter's proposed IPO scheduled.
• Looking for any conflicts of interest.
• Asking about post-IPO support.

Develop IPO documentation and marketing materials

Your team of experts will gather data to complete the next IPO steps. A team typically involves lawyers, SEC experts, company management, underwriters, and certified public accountants. They will complete a letter of intent and file the registration statement (Form S-1) with the SEC.

After the SEC review and any follow-up activities, the group develops a preliminary prospectus known as a red herring. According to PwC’s "Roadmap for an IPO" , this step occurs after about three months and must conform with SEC rules. Company executives will use the prospectus and supporting documents to woo potential investors.

[ Read more: How to Give a Killer Business Presentation (Even If You're Nervous!) ]

Generate interest via an IPO roadshow

Your underwriter will organize meetings at various locations, which will be attended by your management team, an investor relations representative, and potential investors. During a roadshow, you will give your sales pitch , deliver a multimedia presentation, and answer questions. PwC wrote, “This can be a very grueling process since the roadshow can last up to two weeks with several presentations a day.”

Set the initial offer price, and finalize your IPO date

Underwriters consider information gathered while on the road to set an initial price. They develop a final prospectus, file it with the SEC, and send it to potential investors. Your team will meet for a closing meeting and determine when you'll officially take your company public.

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Initial Public Offering (IPO)

Step-by-Step Guide to Understanding an Initial Public Offering (IPO)

Learn Online Now

What is an IPO?

An Initial Public Offering (IPO) is the process wherein a privately held company issues equity in the form of stock to the public markets for the first time.

• An IPO is the process by which a formerly private company decides to raise capital by issuing its equity to outside investors for the first time.
• An IPO is a method for companies to raise equity capital from outside investors in the markets, for which investment banking underwriters are hired to facilitate.
• Once the private company undergoes an IPO, it becomes formally recognized as a publicly-traded company post-IPO (“gone public”).
• An IPO is an opportunity for a corporation to raise significant capital by offering its shares to the public, while existing investors can realize a return on their investment, assuming the lock-up period has passed.

Table of Contents

How Does an Initial Public Offering (IPO) Work?

What is the ipo process timeline, what is the underwriting process in an ipo, what is the sec s-1 filing requirement for ipos, what are the benefits of an ipo (“going public”), what are the risk of an ipo, ipo vs. direct listing: what is the difference, criticism of traditional ipo process (bill gurley).

The term IPO stands for “Initial Public Offering” and describes the process in which a private company issues shares of itself to the public.

The securities issued, most often common shares , represent partial ownership stakes in the underlying equity of the issuer.

An initial public offering (IPO) is a major milestone for many private companies, as most venture or growth-capital-backed companies strive to someday become publicly traded.

Once the formerly private-held company has undergone an initial public offering (IPO), it is now recognized as a public company, i.e. it has “gone public”.

An IPO is an opportunity for a private company to raise significant capital by offering its shares to the public, while existing investors can exit their holdings and realize a return on their investment once the lock-up period has passed.

The newly issued shares of the company are then listed on a stock market exchange, such as the New York Stock Exchange (NYSE) or the Nasdaq .

Stock exchanges like the NYSE and Nasdaq function as a centralized market connecting buyers with sellers, with the market participants ranging from retail investors to institutional investors such as hedge funds .

Investing in an IPO (Source: SEC Investor Bulletin )

• Step 1. Hire Underwriters  → Traditionally, the IPO process is initiated by a private company hiring several investment banks—often referred to as “underwriters”—to advise on the transaction and ensure the maximum amount of capital is raised, with the minimal amount of issues encountered (e.g. conflicts with regulatory requirements).
• Step 2. Red Herring Prospectus + Roadshows → Once the company prepares to “go public”, the investment banking advisors will market the company to institutional investors via “roadshows” to first secure demand from those investors with substantial sums of capital. The roadshow comprises a series of presentations given by senior management alongside their team of advisors to potential institutional investors to gauge their initial interest and figure out how to convince them to participate, i.e. “book building”. Before the roadshow, the advisors also prepare a preliminary prospectus, also known as the “ red herring prospectus ”, which contains information on the company (e.g. financial data, management team background, plans on proceed usage, and other pertinent information).
• Step 3. Submit S-1 Filing  → The pricing of the offering is arguably the most important decision because the offering price is perhaps the most influential determinant of investor demand. The terms surrounding the IPO, such as the offering price and listing date are largely predicated on the interest level of institutional investors, as their participation is crucial to the underwriting process. Therefore, a lack of interest from institutional investors can result in adjustments before the final S-1 filing is submitted to the SEC (or the IPO could even be scrapped if the demand is too bleak and market conditions are too unfavorable).
• Step 4. Obtain Formal SEC Approval → The formal approval and sign-off on the S-1 filing from the SEC is mandatory before the company’s shares can be distributed into the open markets. Once approval is obtained from the SEC, the underwriting process can proceed with the distribution of shares.
• Step 5. IPO Share Issuance → Once shares are officially issued, the company’s IPO is technically complete, and it is now recognized as a publicly traded company. But the underwriters must continue with their efforts to ensure all the stock issuances are sold and to stabilize the price, if necessary, i.e. minimize the price volatility.

The underwriter of most IPOs, aside from those at the very bottom range in size, are offered to the public through a syndicate of underwriters.

The group of underwriters works with the issuer to structure the issuance, with the risk spread across various firms, instead of concentrated on one investment bank.

But while there are likely numerous investment banks advising on the deal, there is typically a “lead underwriter” with more responsibilities and influence than the other advisory firms.

Together, the underwriters of the IPO must structure the offering and settle on the terms. In particular, the offering price must be set appropriately, where the maximum amount of capital is raised (i.e. no money is left on the table) and there is sufficient demand in the market.

Learn More →   Investment Banking Guide

For a private company to successfully undergo an initial public offering (IPO), the specific requirements established by the Securities and Exchange Commission (SEC) must be met.

The core documentation filed with the SEC is the S-1 registration statement , which is composed of two parts:

• Prospectus → The first part of the S-1 contains the legally required information detailing the sale of the securities. The prospectus must describe the company’s business segments, an overview of its operations, audited financial statements, risk factors, the background of the management team, and any material information of relevance to potential investors.
• Information Not Required in Prospectus → The second part of the S-1 contains discretionary information that the company is not required to report to investors, yet must file with the SEC.

The table below describes the key sections of the S-1 :

Undergoing an IPO (i.e. “going public”) provides numerous advantages to the company and to its existing investors.

• Access to Capital → First and foremost, an initial public offering (IPO) represents an opportunity to raise a significant amount of capital, which in turn, is utilized to continue funding a company’s operations and its strategies to reach its next growth stage (and obtain more market share).
• Liquidity Event → From the perspective of management and existing pre-IPO investors, the IPO can be a liquidity event. While the IPO is an opportunity for management to “take some chips off the table”, venture firms and growth equity investors often must liquidate all of their positions, irrespective of their long-term thesis on the company’s prospects. The pre-IPO company, in all likelihood, is backed by venture investors and growth equity investors, so the IPO is an liquidity event, albeit there are restrictions on the timing of when those shares can be sold (i.e. the lock-up period). Venture capital firms and growth equity firms, at the end of the day, are investing on behalf of their limited partners (LPs), so the positions must be exited after the lock-up period and the sale proceeds are then distributed back to the LPs. An exit via an IPO is not necessarily an immediate exit, per se, since there is a lock-up period in which existing shareholders are prohibited from selling their shares for a period spanning between 90 to 180 days.
• Improved Branding → As a side benefit, the company’s branding tends to benefit substantially post-IPO, especially from investors interested in potentially owning shares, which indirectly expands the company’s name recognition and makes it easier to attract (and retain) more qualified employees. For example, widespread coverage of the company’s stock in the media can potentially increase its sales from the positive impact on its brand perception.
• Lower Cost of Capital → By becoming a publicly-traded company, a company can potentially benefit from having access to cheaper forms of capital, e.g. corporate lenders will typically then be able to offer debt financing at a lower interest rate with more favorable terms.

The benefits of becoming publicly traded, especially from a monetary perspective, are relatively straightforward. However, there are several downsides that management must weigh when contemplating the decision to either go public or remain private.

• Less Control → The primary risk to management is the company—by virtue of becoming a public company—is no longer under their complete ownership and control. The new shareholders are partial owners in the company and if a sizable percentage of the shareholder base is displeased with the management team and the company’s financial performance, management is at risk of being voted out and replaced.
• Disclosure Requirements → The disclosure requirements as part of going public is meant to provide full transparency of the internal workings of the company, which opens management up to public scrutiny by investors. In addition, the company’s closest competitors can access their filings such as their financials and plans to achieve future growth. The scrutiny from the markets, equity analysts, and the media can serve as a distraction to the management team and employees.
• Near-Term Oriented : The quarterly filings (10-Q) place more pressure on the management team to meet short-term earnings targets (i.e. earnings per share) and other performance metrics tied to revenue or EBITDA, for instance. Hence, management’s decisions can become short-term oriented due to the external pressure from shareholders and the market to meet their quarterly or annual earnings guidance and targets set by external parties (e.g. equity research analysts).
• Costly Process → The process of going public can be a lengthy process, where the company incurs significant costs, such as advisory fees paid to the investment banks, legal fees paid to lawyers, and other fees paid to third parties like auditors and consultants. The regulatory hurdles, stringent compliance requirements, and disclosure requirements all contribute to the need to hire such advisors and third parties to help arrange the proper paperwork, which of course, all come at significant costs considering the high stakes.
• Operational Disruption → The disruption to the company’s day-to-day operations is yet another factor that must be taken into account. The IPO process can meet unexpected, time-consuming hurdles that can extend the time from announcement to becoming a public company. In that stretch of time, employees can easily become distracted by the media coverage, while management is likely occupied with the entire ordeal of the IPO requirements. The reason all of that matters is that the quality of the company’s products and services can suffer, resulting in less revenue and lower margins from operating inefficiencies.
• Reporting Requirements → The reporting requirements associated with becoming a public company mean more time, effort, and capital must be spent on ensuring compliance with the strict rules established by the SEC. Further, the consequences of not complying with the SEC can result in significant fines and penalties.

In recent years, more companies have opted to go public through a direct listing , as opposed to via an IPO. The direct listing process bypasses the time-consuming, costly underwriting process, as a team of underwriters is not necessary.

The traditional advisory services from an investment bank, such as pricing guidance and stabilization efforts, are not needed because the company in such a case decides to rely on the market to determine the price.

There are significant risks attached to the decision to go public via a direct listing, where the upside and downside are both magnified. Significant price volatility tends to be a characteristic inherent to direct listings , irrespective of the outcome.

Generally, a direct offering tends to only be feasible for companies with a well-known brand, where investor interest is already practically guaranteed.

For instance, Spotify (NYSE: SPOT) decided to proceed with the direct listing route at a time when the company was already the market leader in the music streaming vertical. Thus, the anticipation from investors for the IPO was high, while the overall market sentiment was very optimistic.

The notable benefits of going public via a direct listing are as follows.

• No (or Less) Dilution
• No Lock-Up Period
• Cost Savings (i.e. No or Minimal Advisory Fees)
• Supple / Demand Auction-Based Process
• Increased Liquidity

To reiterate, however, a direct listing remains the riskier option, as the process is relatively new, and because there is no assurance that the shares will be priced “correctly” by the market or that a sufficient number of shares will be sold.

The shares of newly public companies often surge on the first day of trading, with the market capitalization (i.e. equity value ) rising in excess of $50 to $80 million on the first day.

The delta in the IPO offering price and the market share price is the source of much criticism, where investment banks are accused of intentionally underpricing IPOs (and “leaving money on the table”).

However, one must consider that the underwriter must make sure all shares are sold, rather than solely maximizing the valuation. Striking the right balance between the two is easier said than done, and the same applies to predicting demand from the retail market.

With that in mind, the underpricing of an IPO can be attributed to the investment bank’s primary goal of selling all the shares offered in the issuance, i.e. the trade-off between offer price maximization and selling the entire issuance.

The more concerning claim is that investment banks intentionally underprice IPOs for their own self-interest, about building trust among institutional investors.

The fact that those institutions are also clients brings attention to a potential conflict of interest.

The post-IPO spike in the share price of a newly listed company represents profits to the investors (i.e. the institutional network of the investment bank) who participated in the IPO sale.

Given that one of the core functions of investment banking is managing relationships with institutional clients, there is valid reason for such criticism.

Suppose the IPO price was hypothetically priced perfectly, and the share price movement was non-existent (or even declined), then clients would not benefit from the share price appreciation.

On the other hand, an instantaneous rise in the share price post-IPO (and high returns) is likely to establish a long-term relationship with the institutional investor, with an increased probability of participation in future IPOs underwritten by the investment bank.

Therefore, many critics support direct listing instead of the traditional IPO. Venture capitalist Bill Gurley has held long-standing views that the discounted feature of the IPO is not a mistake, but rather a part of the business model.

“Putting Hot IPOs in Perspective” – Bill Gurley (Source: Above the Crowd )

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Roadmap for an IPO: A guide to going public

Starting early is key to a successful ipo.

The landscape for IPOs is, to put it mildly, dynamic. The outlook continues to evolve with more recent triggers, such as changes in the global political climate and interest rate environment, leading to windows of opportunity opening and closing quickly. For organizations looking to open paths to capital, particularly an IPO, it is critical to leverage the right insights to make the right moves at the right times.

There are multiple paths to going public – IPO, SPAC, direct listing, etc. How do you know which is the right path for you? Is now the right time? What can you expect after going public? You need a plan that sets you apart long after the bell rings. 

Let’s get started

Jump ahead to the section of interest

The decision to go public 

Simply requiring additional capital does not always mean that going public is the right answer. There are a handful of important questions you should consider, and it is important to keep specific goals in mind throughout the going-public process.

Determining filer status

Filer status drives its reporting requirements during both the going-public process and throughout life as a public company. Filer status should be assessed continuously during the going-public process and each fiscal year thereafter for public companies.

Preparing to become a public company

Preparation is the secret to success. The better prepared your company is, the more efficient and less costly the process can be. We recommend that an orderly plan be executed over a one- to two-year period.

Structuring your IPO

Choosing the appropriate structure for an IPO can provide substantial benefits. Regardless of the structure or process chosen, getting the right company or group structure in place is critical to driving value and efficiency. 

Maximizing the value of your IPO

The equity story is the foundation of any successful IPO, as it creates a clear vision for your organization while serving as a compelling rationale for why investors should be interested. Investment bankers will rely on an equity story to determine both the marketability of the company and the valuation. 

Common accounting and financial reporting issues

From financial statements to taxation and compensation to complex technical accounting, get in front of these issues well in advance of the registration process so that they won't be an impediment to becoming a public company.

Building a going public team

You need advisors who have “been there and done that.” Be on the lookout for key players, from the specialists to the staff members who will help prepare the registration statement and other sales documents.

Preparing the registration statement

Management knows the business best, so it should take an active role providing direction in the drafting process. Allowing others to draft significant amounts could result in a registration statement that deviates from management’s view. 

Navigating the IPO process

Most successful IPOs are launched by those businesses that operate as public companies well in advance. An experienced project management team can help position you for success.

We are public! Now what?

Once listed, a company will be under far greater public scrutiny and will have a range of continuing obligations. Public perception has a direct effect on the value of its stock. Do not underestimate it.

Register now!

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To create a clear path forward, you need the confidence that comes from working with a team of straight-talking advisors and actionable insights from a team of dedicated professionals. Find out how we can guide you through each step of the readiness assessment process and beyond.

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What Is an IPO? Definition and How IPOs Work

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An IPO marks the first time a privately held company becomes a publicly traded one.

IPOs can potentially be lucrative opportunities to buy a small stake in a company you believe will increase in value.

IPOs can be risky too, but thorough research, small investments and smart asset allocation can mitigate those risks.

Thousands of companies sell shares of stock in their businesses on U.S. stock exchanges. How did they snag a spot in investor brokerage accounts? Via a process called “going public,” more formally known as filing for an initial public offering, or IPO.

IPO meaning

An IPO, or initial public offering, is when a company goes from being privately-owned to publicly-owned. That means that investors can purchase its stock on the stock market.

Those company shares may then be purchased on a particular exchange, like the New York Stock Exchange or the Nasdaq. Investors can then purchase those shares, which makes them a shareholder in the business.

Once a company is listed on a stock exchange, shares of its stock can be traded — bought and sold — between investors. (Learn more about the stock market and how it works .)

» View the best brokers for investing in IPOs

How does an IPO work?

An IPO is often a complex process in which a group of "underwriters" (typically large investment banks) buy all of the shares of the new company and then re-sell them to ordinary investors.

However, some companies bypass the conventional IPO process by going public through a direct listing or a special-purpose acquisition company (SPAC) .

A company that is going public through an IPO will announce a price range and IPO date in advance. At that time, interested investors will be able to purchase shares through a brokerage account.

Keep in mind that the published offering price is unlikely to be the share price that's available to retail investors — once the stock begins trading, its share price swings with the rest of the market just like every other public company. Often, IPOs spike in price in the early hours or days, then quickly fall.

Where can I find out about upcoming IPOs?

NerdWallet has a list of upcoming IPOs , as do the major stock exchange websites like Nasdaq and NYSE. And there are often rumors published in the media about companies that may go public in the near future, but it’s pure speculation until a company makes a formal announcement of its intentions.

It can be several months, or even years, until an IPO is finalized. To prepare, investment bankers estimate the company’s valuation to decide the price per share of stock and how many shares will be offered to investors.

All of that information and more becomes available to the public when the company files a registration statement — typically a Form S-1 — with the Securities and Exchange Commission. This preliminary prospectus provides a lot of background information about the company and its business, management team, sources of revenue and financial health.

A company’s initial filing is typically a draft and may be missing key information, such as the final offering price and date the upcoming IPO is expected to launch. Keep checking back for amendments to the Form S-1 on the SEC’s EDGAR database so you’re making investment decisions with the most up-to-date IPO information.

Why do companies file IPOs?

An IPO enables a growing company to raise a lot of cash quickly. The money investors pay to buy shares can be used to fund projects, pay down debt and help the business expand operations or hire more workers.

A stock market launch also triggers a broader swath of changes a company must make, not least of which is issuing reports on its financials to the public quarterly and annually and allowing shareholders to vote on some business decisions, such as who sits on the company’s board of directors.

For investors, IPOs can be an attractive and lucrative opportunity to purchase a small stake in a company they believe will increase in value. But buyer beware: Some stocks that are now considered runaway successes struggled for months or even years after their IPOs. Consider that after going public in 2012, Meta (then known as Facebook) took more than a year to trade above its IPO price. [0] Meta Investor Relations . https://investor.fb.com/stock-info/default.aspx . Accessed Mar 17, 2022. View all sources

What are the risks of investing in an IPO?

You may celebrate getting in early on the latest IPO if it proves to be a long-term success, but you’ll be cursing that same stock if it blows up your portfolio. No investment is a sure thing, and IPOs are no exception.

While IPOs may appear to offer a tantalizing get-rich-quick opportunity, there have been some famous flops over the years. Take Pets.com, which liquidated less than a year after its IPO. According to an analysis from Nasdaq of IPOs between 2010 and 2020, two-thirds were underperforming the overall market three years after their initial offering day. [0] Nasdaq . What Happens to IPOs Over the Long Run? . Accessed Mar 17, 2022. View all sources

To mitigate some of the risks, take the same approach to investing in IPOs as you would to buying any other stock:

Know what you’re getting into. When researching a company, start by reading its annual report — if it has been publicly traded for a while — or Form S-1. Many of the risks to a company’s short- and long-term success are outlined by company insiders in those reports. But don’t just take their word for it: Do your own research into the industry, the company’s competitors and general stock market conditions before you invest in any company. That's a smart thing to do whether the company is established or new to the public markets. (Here’s how to research a stock .)

Ease your way into ownership. Buying a lot of shares of a volatile stock at the beginning can set you up for a wild ride. When a company’s share price is somewhat unpredictable, dollar-cost averaging (spreading out your trades and purchasing the stock at regular intervals over time) protects you from the risk of, say, buying shares at the peak. And keep in mind that you don’t have to be the first in line: Stocks like Apple , Amazon and Google have provided rich gains for investors who bought shares years after those companies' initial public offerings.

Keep your portfolio in balance. Never let a single investment — IPO or otherwise — skew your portfolio’s allocation in a way that could be detrimental to your long-term goals. To reduce your overall risk, it's often suggested that the portion of your holdings devoted to individual stocks make up no more than 5% to 10% of your overall portfolio, with the remainder of your long-term savings spread out across a variety of index mutual funds .

If an IPO is what gets you excited about investing in the stock market for long-term growth, that’s great. Just remember that individual stocks on their own aren’t the only way to get in on the action — there are other diversified investments like the aforementioned index funds that allow you to buy a large selection of stocks at once. To explore these and other options, see our step-by-step guide for beginners on how to invest in stocks .

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What Is an Initial Public Offering?

We look at what it means for a company to “go public.”

Editor's note: This article originally published on Sep. 23, 2020.

An initial public offering, or IPO, is a process a private company undertakes to become public. Almost all companies start as privately funded, receiving money from founders, friends, and family. Once the company has a strategic business plan, it can apply for small-business loans and venture capital funding.

However, these private funding sources will eventually run out for a growing company. The company then looks for alternative capital to reinvest in its business. A common next step is to look for public funding by making shares available to public investors through an IPO.

What Are Advantages of an IPO? The most important reason for going public is access to funding. Institutional and individual investors can buy public shares of the company's stock to help finance business reinvestment. In return, investors are potentially rewarded with a share of the company's earnings and dividends.

Another IPO benefit is alternative funding sources. Part of going public is disclosing a company’s financial information, making revenue sources and costs more transparent. This helps a company apply for loans more easily.

IPOs are also helpful when one company wants to acquire another. In exchange for purchasing the other business, the company can offer shares of its own stock.

In addition, they allow the company to enhance its employee compensation plan. Public companies can offer stock options to employees in addition to a salary, benefiting those who started early in the company’s history.

Going public also helps the company’s brand awareness. It’s a very public event, and the company can boost its prestige by listing on a popular exchange, like the New York Stock Exchange or Nasdaq.

How Does an IPO Work? The first step in going public is selecting an investment bank to manage the IPO process. These banks include companies like JPMorgan Chase JPM and Goldman Sachs GS. Their main objective is to round up buyers interested in purchasing the company's stock. They gauge interest in the IPO and market the stock to institutional investors. They will also assemble a team, including accountants, lawyers, and SEC experts, to handle different parts of the IPO.

Due diligence is the second step in going public. This involves collecting financial documents, completing SEC regulation forms, and publicizing the business model, risks, and competition. This is also when the company assembles the board of directors, the team responsible for protecting shareholder interests and holding the company leadership accountable.

The third step involves the SEC approving the IPO. This includes the investment bank and company agreeing to an IPO date, how many shares will be available to the public, and the price for each share. Once the details are settled, the investment bank will distribute financial information to potential investors.

Going public is the final step. The company is listed on the exchange and begins trading on the open market. The share price agreed upon by the company and investment bank can now fluctuate based on supply and demand forces.

What Are Disadvantages of IPOs? Fees are the largest concern companies have when going public. Investment bank services aren't cheap, and the costs to maintain financial, legal, and SEC teams are steep. These are just the costs to do an IPO--there are others to maintain a public presence. Financial reporting, auditing, and regulation costs will be constant once the company's stock is available to public investors.

SEC regulation is a big concern--and for good reason. The SEC’s goal is to protect investors, so it wants companies to present accurate and complete information. Intense scrutiny from this regulatory agency won’t go away, so these companies must be prepared to meet their guidelines.

Another issue for company leadership is pressure from shareholders and the board of directors. Because these groups now influence the company’s direction, they might force leaders to move the business in a way the leaders didn’t intend.

Going public can be distracting for company leadership. Driven to increase stock performance, executives might drift away from their company’s mission and engage in unrelated initiatives or questionable corporate behavior.

What Do IPOs Mean for Investors? Once a company becomes public, it makes sense to wonder if that stock is right for investors. We recommend waiting a few months until the stock's price stabilizes, but each IPO is different, says Morningstar's director of investor education Karen Wallace. If the stock's price is less than Morningstar's fair value estimate, it could be worth considering.

More in Stocks

10 Top Dividend Stocks for 2024

Finding Small-Cap Stock Opportunities In a Big-Cap World

The 10 Best Companies to Invest in Now

About the author, sachin nagarajan.

Sachin Nagarajan is an associate manager research analyst, equity strategies, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Before joining Morningstar's manager research team in 2022, Nagarajan worked on Morningstar's editorial team, where he showcased the firm's equity research and sustainable investing content. He was also a customer support representative on the Morningstar Office support team.

Nagarajan holds a bachelor's degree in English from University of Dayton.

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How to Prepare a Company for an Initial Public Offering

An initial public offering of stock can be viewed as the definitive sign of a company's success. here is a look at the steps a company can take to prepare for an ipo..

For many growing companies , "going public" is more than just selling stock. It's a signal to the world that the business has made it. That's why undertaking an initial public offering (commonly known as an IPO) -- the first sale of stock to the public by a private company -- has long been the ultimate goal for many an entrepreneurial business. An IPO can not only provide a company with access to capital to fuel growth and liquidity for founders and investors, but it provides the public market's unofficial stamp of approval. Yet recent regulatory changes, such as the 2002 Sarbanes-Oxley Act (SOX), have given new meaning to the term IPO. It's not just a public offering of stock, but it can also be an intensely arduous and increasingly expensive ordeal. In order to gain the benefits of raising capital and achieving greater liquidity that an IPO offers, companies must be more solidly established and better able to pass tougher regulatory requirements than in the past. Doing so comes with a bigger price-tag than ever before. These days, companies going public should expect to pay more than $2 million in out of pocket expenses to cover a host of fees – among them legal, accounting, printing, listing, filing --  in addition to the underwriter discount and commission of 7 percent of the offering proceeds and to shore up internal processes to meet the  tougher reporting and governance standards for public companies. The following pages will detail the pros and cons of going public, the qualifications a business needs to go public, and the steps involved in the IPO process.

Dig Deeper: What the Sarbanes-Oxley Act Means for Companies that Want to Go Public

Taking a Company Public: Why You Should Consider It An IPO is one of the most sign ificant events in the life of a business. The capital raised through a successful public offering boosts a business' ability to expand into new market s or grow through acquisitions. It can help a company attract new talent with stock options and other equity awards and reward initial investors with liquidity. "There is also the prestige factor," says James S. Rowe, a securities partner with Kirkland & Ellis LLP, a 1,500-lawyer firm that has counseled countless companies through the IPO process. "The fact that you're a public company gets you in the door with vendors and suppliers and prospective business partners. Being a publicly traded company has additional cache and is something that can be helpful to a company in its commercial relationships." Such benefits, however, don't come without costs. One important intangible cost to consider is the loss of control over the business when a formerly private company goes public. The following is a list of pros and cons to consider in determining whether to take a company public.

Dig Deeper: Is Consolidation a Threat or a Boon to Small Companies?

Taking a Company Public: The Benefits of Going Public

•    Given the higher valuation of a public company and the greater liquidity in the public markets, there is greater access to capital, Rowe says. In fact, while the first public offering may be costly and time consuming, if there is market demand for the stock a company can always issue more stock -- which can be conducted more quickly and efficiently as a seasoned issuer. •    The increased liquidity can help a company attract top talent by enabling it to grant stock options or restricted stock awards. •    A public offering provides a business with the currency with which to acquire other businesses and a valuation if your business becomes an acquisition target, Evans says. •    An IPO serves "as a way for founders or em ployees or other share or option holders to get liquid on their investment, to see a financial reward for the hard work that has gone into building the business," Evans says. •    The act of going public can also serve as a marketing event for a company, to drum up interest in the business and its products or services.

Dig Deeper: What's Your Business Worth Now? Taking a Company Public: The Downside of Going Public

•    The biggest downside to going public is often the loss of control over the company for management and founders/investors. Once a company is public, managers will be under often intense pressure to meet quarterly earnings estimates of research analysts, which can make it much more difficult to manage the business for long-term growth and predictability. •    The SEC requires public companies to reveal sometimes sensitive information when they go public and on an ongoing basis in required filings. Such information may include data about products, customers, customer contracts, or management that a private company would not have to reveal. •    Public companies have additional reporting and procedural obligations since the passage of the Sarbanes-Oxley Act, many of which may be costly for a company to implement, such as the Section 404 requirements relating to internal controls over financial reporting, says Bruce Evans, managing director at Summit Partners, a Boston-based private equity and venture capital firm. •    In a worst-case scenario, a group of dissident investors could potentially obtain majority control and wrangle control of the company away from the board. •    If a stock performs poorly after a company goes public, an IPO can generate negative publicity or "an anti-marketing event" for the company, Evans says.

Dig Deeper: Examples of Confidential Info You Should Prepare to Disclose

Taking a Company Public: Which Companies Should Consider an IPO Not every company can -- or should -- go public. There is an array of factors to consider before summoning the bankers. These factors include meeting certain financial qualifications set by the various exchanges, the appropriateness of an IPO strategy for your business and business goals, and the market receptivity to IPOs generally and within your particular sector. Exchange Qualifications Before you can even consider taking your company public, you must meet certain basic financial requirements, which are set by the exchange where you expect to list. For instance, if you want to list your company's stock on the New York Stock Exchange (NYSE), you will generally need a total of $10 million in pre-tax earnings over the last three years, and a minimum of at least $2 million in each of the two most recent years. The NASDAQ Global Select Market requires pre-tax earnings of more than $11 million in the aggregate in the prior three fiscal years and more than $2.2 million in each of the two most recent fiscal years. Fortunately, both exchanges have alternative markets that have less rigorous financial requirements for listing companies. The NASDAQ Global Market requires companies have income from continuing operations before income taxes in the latest fiscal year or in two of the last three fiscal years of $1 million or more. The NASDAQ Capital Market has a lower barrier to entry, requiring net income from continuing operations in the latest fiscal year or in two of the last three fiscal years of at least $750,000. Meanwhile, the NYSE's American Stock Exchange (AMEX) requires pre-tax income of $750,000 in the latest fiscal year or in two of the three most recent fiscal years. The exchanges also offer alternative listing standards based on cash flow, market cap, and revenue for larger companies not meeting the pre-tax earnings' tests. Under SEC rules, a company must also have three years of audited financial statements before it can register to go public. If a company lacks three years of audits, it can often create them 'after the fact,' Rowe says, assuming it has the records and systems in place to allow an auditor 'look-back.' Since that can be a costly and time-consuming undertaking, pre-planning is essential.

Dig Deeper: Stock Exchanges and Securities Laws

Taking a Company Public: Picking the Right IPO Strategy

Even if a company meets the minimum requirements for listing on one of the exchanges, it may not be in the company's best interest to go public. "I think businesses should go public that have achieved a size that would allow them to have a predictable revenue and earnings stream," Evans says. "Smaller businesses tend to be more volatile and there is a premium paid for predictability in the public markets." Another factor to consider is whether your business will have a market capitalization large enough to support enough trading in your stock that buyers consider that stock to be "liquid," Evans added. "To go public with too small a market cap means that buyers don't get a really liquid public security. The reality is that unless you have enough of a market cap, I think public offerings are probably best for growth companies." Market Considerations Another factor that is increasingly determining whether companies go public is the economy and, in particular, the public's appetite for IPOs. The IPO market hit a 30-year low in 2008, when only 31 companies went public on the major U.S. exchanges, according to Hoovers. Nine years earlier, in 1999, there were 477 IPOs, more than half of which were venture-backed, according to the National Venture Capital Association (NVCA). Market interest in IPOs definitely waxes and wanes – especially recently. The good news is that the IPO market picked up slightly in 2009, when 63 companies went public on the major U.S. exchanges, with virtually all of that activity occurring in the second half of the year. "There is a pipeline, things are turning around," says Evans. But he says the market for IPOs would get better if some of the regulations in the Sarbanes-Oxley Act were pared back. The law, which sought to provide the public with more corporate accountability, requires compliance with so many costly rules that the overhead associated with compliance "adds millions to a company's operating expenses," Evans says. "Companies tend to have to wait longer now to overcome that expense before they can go public. It's a direct impediment to their ability to go public." Another component of the law requires CEOs and CFOs to personally certify financial and other information in their securities filings. "Quite frankly, it makes it less attractive in some instances to want to take that on," Evans says.

Dig Deeper: The Declining IPO Market During a Recession

Taking a Company Public: The Steps You'll Need to Take If your company meets these financial requirements, you determine an IPO will help you meet business goals, and the market conditions appear right, then it's time to begin the IPO process. Typically, it takes four to eight months to complete this process, from the time you actively engage underwriters to the time you close the offering. Here are the key steps in the IPO process: Put the right management team in place. Fast growing companies generally have strong management teams already in place, but the demands of becoming a public company often require additional strengths and capabilities. The senior management team must have considerable financial and accounting experience in complying with increasingly complex financial and accounting requirements. In light of this, many pre-IPO companies seek to recruit CFOs or other executives from outside who have had experience going public with other companies. "I don't agree with that at all," Evans says. "An experienced CFO that knows his or her business well, and who has been successful in that role, doesn't need to have gone through a public offering before." But it is important that key managers possess strong communication skills to present the company's vision and its performance to the market, and to meet the often-intensive informational demands of research analysts and investors. The composition of your board of directors may also need adjustment. The exchanges require that a majority of the company's board of directors be 'independent,' and that the audit, compensation, and nominating corporate governance committees -- to the extent they exist -- be composed of independent directors. In addition to creating even more stringent independence requirements for audit committee members, Sarbanes-Oxley requires an issuer to disclose whether it has an 'audit committee financial expert.' To meet these requirements, independent board members (who are not insiders or affiliates) may need to be recruited, particularly for the audit committee, Evans says.

Dig Deeper: What to Pay Your Top Team

Upgrade financial reporting systems. Before proceeding, you need to ensure that you have the proper systems in place to ensure a flow of accurate, timely information. Identifying the right metrics and closely monitoring them can significantly enhance your business results, since it forces everyone in the company to focus on the factors that drive your business. Sarbanes-Oxley imposes a number of additional requirements in this area, including 'disclosure controls and procedures,' which are necessary to ensure that information is properly captured and reported in the company's public filings. Another requirement relates to 'internal controls over financial reporting,' which are designed to help ensure that the company's financial statements are accurate and free of misstatements. Developing and assessing these controls can take time and be quite costly. This is especially true in the case of internal controls over financial reporting, which are governed by Section 404.  Although IPO issuers are not required to comply with 404 until well after they go public, it is important to anticipate any potential material weaknesses in these controls and to address them as early as possible.

Dig Deeper: How to Revamp Your Company's Financial Reporting System

Select investment bankers. In the business, this is called the "beauty contest." It's a process through which you typically choose your investment banking partners and assure that they concur that the business is ready to go public, that they have the sales and distribution capabilities you need for successful execution of the IPO, and can provide strong analyst coverage once you go public. "It's not uncommon to invite three to five bankers to each make presentations to the decision makers as to how they see the company, what valuation, what they expect to see in the current market, and why they are the firm that should lead the offering," Rowe says. You should use a variety of criteria for choosing your bankers: a proper "fit" personality-wise, good research and analyst coverage, knowledge and understanding of your business and your industry and whether that bank has brought other companies public in your sector, Rowe says. After engaging underwriters and embarking on the IPO process, a company is considered to be 'in registration' and therefore subject to SEC 'quiet period' restrictions, which will significantly limit what the company and its managers can say and do outside of the formal registration process. In 2005, a safe harbor was created for statements made more than 30 days before the filing of an SEC registration statement, but issuers must still be vigilant in controlling information that could be viewed as 'conditioning the market' for their securities.

Dig Deeper: What to Know about Investment Bankers and Other Key Players

Craft your "story" and draft the prospectus. This is where the lawyers get involved. The principal offering documents include the IPO prospectus, which is filed with the SEC as part of the IPO registration statement, and the 'road show' slides, which the underwriters and senior management will use, together with the prospectus, to market the offering. Crafting the right "story" in these documents is critical to the success of the IPO. "It's really about positioning your company -- highlighting its strengths, strategy is, the market opportunity, and why this is a good investment over the long term," Rowe says. Because the prospectus is subject to extensive disclosure requirements, it will typically take several weeks to prepare and lawyers will try to anticipate the questions and comments the SEC will have to the filing.

Dig Deeper: SEC Approval and the Preliminary Prospectus

File the registration statement and begin the review process. Once a draft of the prospectus is completed, the company will file the registration statement with the SEC. While immediately available to the public on the SEC's EDGAR system, the registration statement is subject to review and comment by the SEC through a review process.  Almost invariably, the SEC reviews an issuer's initial filing and typically provides extensive comments within 30 days of the initial filing. Shortly after filing, the company will also file its initial listing application with the exchange on which it wishes to list, and the underwriters will make filings with the Financial Industry Regulatory Authority (FINRA) in regard to the underwriter compensation arrangements. "It can be an extensive and labor intensive process," Rowe says. "You can not price the IPO unless you have cleared all the SEC comments."

Dig Deeper: How to File a Registration Statement

Organize the road show. The road show is launched once the issuer has responded to and resolved the SEC staff's material comments, generally through multiple amendments to the registration statement. That's when the issuer will print the 'reds' -- the preliminary prospectus setting forth an anticipated offering size and anticipated price range. They call it the "road show" because it typically lasts for up to two weeks, during which time senior managers meet prospective investors, often in multiple cities in the same day. "It really is taking the show on the road," Rowe says. "It's not uncommon to be in two or three cities a day for five days a week. You have investor meetings every waking moment of the day, including investor breakfasts and lunches, all with the intention of building a book for the underwriters so the IPO can succeed."

Dig Deeper: Making the Most of the IPO Road Show

Price the IPO. When the review process is completed and the underwriters have 'built a book' of prospective IPO investors, the issuer's board of directors -- typically through a pricing committee -- and the underwriters will set a price at which the company and any selling stockholders will agree to sell shares to the underwriters at closing. The pricing usually occurs after the close of the markets on the final day of the road show; the stock will begin trading on the exchange on a 'when issued' basis the next morning. Typically, Rowe says, companies will reconstitute their capital structure so that they can target a price of between $14 and $16 per share, a range that is attractive to most IPO investors. "At pricing, you want to maximize the price yet you don't want to overprice the offering just to get the last dollar out," Rowe says. "It's critical that the stock to perform well in the aftermarket." If the stock trades down, it can create bad publicity for your company and can make it exceedingly difficult to complete a follow-on offering in the future.

Dig Deeper: Assessing One Company's Grim IPO Price

Complete the offering and begin life as a public company. The IPO will typically close on the fourth business day after the pricing. At that time, the issuer and any selling stockholders will release the shares to the underwriters, and the underwriters will purchase the shares, frequently at a 7 percent discount to the price at which they have offered the shares to the public -- that's their fee. The issuer will continue to be in an SEC quiet period for 25 days following the pricing -- the period during which broker-dealers have an obligation to deliver prospectuses to investors. During that period, the company must continue to be circumspect in what, if anything, it says to the public outside of the IPO prospectus. Following the expiration of the quiet period, the company will be in frequent communication with the market, both through its periodic SEC filings and in its interaction with the analyst and investor communities.

Dig Deeper: How to Grow Fast

Related Links: More Articles from Inc.com on Taking a Company Public IPO basics, players and paperwork, big decisions, and cautionary tales. "Two IPOs Beat the Odds" OpenTable and SolarWinds go public and see their initial public offerings soar. "IPOs Hit a 30-Year Low" But the guy who took Google and Netscape public is not concerned. "Venture-Backed IPOs Top $4.27 Billion" More companies are going public, led by the technology sector, but mergers and acquisitions have slowed. Recommended Resources: Nasdaq's Listing Requirements and Fees Information for companies interested in having stock publically traded on the Nasdaq market. New York Stock Exchange (NYSE) NYSE's listing requirements for companies that want to have stock publically traded on the exchange. NYSE Amex Listing standards for the NYSE Amex exchange. National Venture Capital Association (NVCA) -- Made up of 400 member firms, the trade association for the U.S. venture capital industry provides information for entrepreneurs and investors and current research on the venture capital industry. Securities and Exchange Commission (SEC) -- The SEC provides information for companies considering an IPO, including this section on guidance for small companies considering an initial public offering of stock. Grant Thornton Going Public: A Guide for Owners

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IPO 101: All You Need To Know About An Initial Public Offering (IPO)

• capital gains
• intrinsic value

Diversifying your investments entails more than merely balancing your portfolio’s equities and bonds. Fine art and other alternative assets may also have a place in your portfolio.

The wealthy elites are no longer the only ones collecting and investing in art.

You can diversify your assets and perhaps locate something pleasant to hang on the wall if you are interested in art. As an investor, you can help your company raise a lot of money quickly by going public. Going public also provides a company with numerous opportunities for publicity and media coverage. Before your company goes public, here’s what you should know.

What Is an IPO?

When a privately owned company sells shares to the general public for the first time, it is called an initial public offering. An IPO, in essence, is the transition of a company’s ownership from private to public. As a result, the IPO process is often known as “going public.”

Companies typically go public to raise capital to pay off debts, fund expansion plans, improve their public profile, or allow company insiders to diversify their holdings or create liquidity by selling all or a percentage of their private shares.

How Does an IPO Work?

When a company wants to go public, it hires an investment bank (or a group of investment banks) to underwrite the IPO, usually after demonstrating a track record of growth and other positive outcomes. Banks support initial public offerings by committing large sums of money to purchase the shares before they are listed on any public exchange.

Additional tasks of the underwriter include completing due diligence on the company, which involves reviewing financial data and examining its business plan and prospects. The firm that is going public submits a registration statement with the Securities and Exchange Commission (SEC), which includes its prospectus, with the help of the underwriter.

Why do Companies Pursue IPOs?

Going public has several advantages, the most important of which is easier access to capital. An IPO’s proceeds can be utilized for expansion, market research , marketing, and various other uses.

Equity holders in the formerly private company are likewise rewarded when the company goes public. Once a stock is publicly traded, executives, employees, and anyone who owns equity stakes can sell them quickly following a six-month lock-up period. This lock-up period helps keep the price of freshly issued shares stable by prohibiting insiders from selling all of their holdings at once directly after the IPO.

Drawbacks to Going Public

Companies must comply with SEC reporting standards. Publicly-traded corporations must produce frequent disclosure statements, report financial results, hold quarterly earnings calls, and operate transparently. These things all take time and organization-wide coordination. Failing to do any of these things efficiently can spell disaster or a newly public company. Once you submit yourself to these new requirements and regulations, there’s no going back.

Are (IPOs) Good Investments?

Though initial public offerings (IPOs) might benefit issuing corporations, they are not necessarily beneficial to individual investors. Investing in initial public offerings (IPOs) can be helpful, but it is also much riskier than buying stock in established public companies. Because demand for newly issued stocks is often unclear at the outset, the prices of freshly published stocks might fluctuate dramatically on the first day of trading and in the days that follow.

What Happens If an Initial Public Offering Fails?

When a company goes public, the hope is that everyone will profit. An IPO, if successful, raises a large sum of money to keep a company afloat. When the founders sell their private shares, they usually make a tidy profit. What happens if the unexpected occurs and the company cannot sell enough shares to stay afloat?

This is the moment for businesses to put all of the paperwork they’ve accumulated to good use. Other funders may be interested in documents detailing their business strategy, sales, profitability, and sales projections.

Companies with trouble recruiting new investors may need to cut costs and postpone new projects until the IPO has stabilized. There are various additional options for IPOs to raise money to stay afloat.

What Factors Influences the Success of an IPO?

There are many different levels of success. Here are some examples of how to assess an IPO’s success:

• Capital raised : Even though the typical IPO deal size between January 1, 2007, and March 31, 2021, was $163 million, several companies managed to raise IPO money over that amount.
• Value : Strong demand for IPO shares often leads to a greater valuation for the company since IPO investors register their interest in the stock, resulting in an “oversubscribed” book.
• Share price appreciation/return : A rise in the share price on the first day of trading and from the IPO to the current trading price is considered a standard measure of success.
• Recruiting new customers and talent : Going public raises corporate awareness among potential customers and can aid in the recruitment of top talent.
• Supplier Confidence : In terms of stability and long-term growth potential, suppliers generally view the IPO process as a net benefit for the IPO firm.

There are numerous approaches for a company going public to attract investors to its initial public offering (IPO). A company with higher growth than the industry average will generally attract buy-side investors. Investment bankers look for companies that can meet several criteria to increase the possibilities of a successful offering and strong aftermarket performance.

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Initial Public Offerings (IPOs)

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on January 31, 2024

Get Any Financial Question Answered

Table of contents, what are initial public offerings (ipos).

Initial Public Offerings (IPOs) are the first sale of stock by a private company to the public. Companies can use it to raise new equity capital for expansion or other purposes.

IPOs are often associated with high-growth companies, and there are several reasons why companies may choose to go public.

Going public can provide a company with new capital to invest in growth, help to expand its operations, and make it more visible to potential customers and partners.

When a private company goes public, it is an opportune moment for original private investors to profit from their investment . This is usually done by issuing shares at a premium price, which lets public investors get in on the action too.

How Do IPOs Work?

When a firm reaches a certain point in its development where it needs to raise capital , one option it may consider is an initial public offering.

A private company going public raises money by issuing and selling shares of itself in a process called an IPO.

It is a massive undertaking for a private company because it must now answer to shareholders, provide regular financial reports, and comply with the Securities and Exchange Commission (SEC) regulations.

The company also undergoes a significant change in ownership structure, from private ownership to public ownership.

Typically, when a company's private valuation reaches around $1 billion, it is often ready to go public.

This is known as unicorn status. Private firms at various valuations with strong fundamentals and demonstrated profitability potential can also qualify for an IPO, depending on the market competition and their capacity to satisfy listing standards.

To pull off an IPO, the company must first determine how many shares to sell and at what price. This is done through a process of share underwriting , where investment banks commit to buying up the securities of the issuing entity and then sell them in the market.

The number of shares and the price at which they are sold will determine the amount of money the company raises in its IPO. The shareholders’ equity will also increase by the amount of money raised in the IPO.

The money raised from an IPO can be used to finance operations, expand businesses, or pay off debt.

Overall, an IPO is a significant event for any company. It is a complex process that requires careful planning and execution. But it can also be rewarding, providing the company with much needed capital to grow its business.

History of IPOs

IPOs have been around for centuries. In 1602, the Dutch East India Company was the first company to offer shares to the public.

There have been many notable IPOs throughout history. Some examples are the First Bank of the United States IPO in 1791 and the IPO of The Coca-Cola Company in 1919.

One notable example of a modern company that went public through an IPO is Facebook. Facebook's IPO took place on May 18, 2012. Facebook's IPO was the most significant in the history of technology IPOs.

Today, IPOs are a common and critical source of capital for high-growth companies. In 2019, there were more than 1,000 IPOs globally , raising a total of more than $100 billion.

The IPO Process

The process of going public can be complex and time-consuming, and it typically involves the services of investment bankers, lawyers, and accountants.

The following are the steps involved in the IPO process:

Step 1: Proposal Creation

The first step is to develop a proposal or so-called "book" that outlines the company's business plan, financial situation, and investment opportunity. This book is then sent to potential underwriters, who are banks or securities firms that help sell the stock to investors.

Step 2: Underwriting Selection

Once an underwriter is selected, the company and underwriter will sign an agreement in which the underwriter agrees to buy all of the shares being offered by the company at a set price (the "offer price").

The agreement also typically includes an "over-allotment option," which gives the underwriter the right to purchase additional shares (up to 15% of the total offering) if demand for the stock is high.

Step 3: Team Assembly

After the underwriting agreement is in place, the IPO team (which typically includes investment bankers, lawyers, and accountants) works on putting together the necessary paperwork for the SEC filing.

Step 4: SEC Filings

The company must file a registration statement with the SEC, which outlines the terms of the offering and discloses information about the company's business, financial situation, and risk factors.

The registration statement becomes effective after it is reviewed and declared effective by the SEC.

Step 5: Road Show Marketing

After the SEC has cleared the offering, the underwriter will go on a "road show" to market the stock to potential investors.

During this time, the company's management team will meet with institutional investors, such as mutual fund managers and pension funds, to try to get them interested in buying the stock.

Step 6: Pricing

The investment banks set the IPO price based on their assessment of investor demand. Once the offering price is set, the company will sell its shares to the underwriters at that price.

Step 7: Trading

The shares are then distributed to the underwriters' clients, and trading of the stock begins on the open market. Institutional investors often buy large blocks of stock when a company goes public, so they can sell them later at a profit. Individual investors can also participate in IPOs by buying shares through a broker.

Step 8: Post-IPO

After an IPO, some clauses may be put into place- for example, underwriters may have a set amount of time to buy more shares after the IPO date. However, certain investors might fall under quiet periods during this time.

The company will then be required to file periodic financial reports with the SEC. The company's stock will also be listed on a stock exchange, such as the NYSE or Nasdaq .

The company will now be subject to all the rules and regulations that apply to public companies.

Benefits of an IPO

IPOs can provide a number of benefits to companies, including the following:

Access to Capital

IPOs can be a significant source of capital for high-growth companies. The proceeds from an IPO can be used to finance expansion, pay off debt, or for general corporate purposes.

Enhanced Visibility and Credibility

Going public can increase a company's visibility and give it more credibility with customers, suppliers, and employees. It can also make it easier to attract top talent.

Increased Shareholder Value

An IPO can create shareholder value by providing liquidity for early investors and founders and by giving the company access to a larger pool of potential investors.

Drawbacks of an IPO

Some risks and drawbacks are associated with going public via an IPO.

Costly and Time-Consuming

The IPO process can be costly and time-consuming, and there is no guarantee that the offering will be successful. Costs are borne by the company, not the underwriters.

Increased Regulation

Once a company goes public, it will be subject to increased SEC scrutiny and will be required to disclose more information about its business. This can make it more difficult to operate in a competitive environment.

Loss of Control

Going public typically means that a company will have to give up some control. For example, shareholders will have a say in major decisions, and the company will be subject to greater scrutiny from regulators, the media, and the public.

Volatile Stock Price

The stock price of a newly public company can be volatile, particularly in the first few months after the IPO. This can create concerns for management and make it difficult to raise additional capital.

Pressure to Perform

Public companies are under pressure to maintain or increase their stock price and meet quarterly earnings estimates. This can lead to short-term decision making and pressure on management.

Performance of IPOs

Several factors can affect the performance of an IPO, including the economic conditions at the time of the offering, the company's financial condition, the sector in which it operates, and investor sentiment.

In general, IPOs tend to perform poorly in bear markets and during periods of economic uncertainty. They also tend to underperform the market in the short term, but there is evidence that they outperform over the long term .

The following are some of the key considerations for IPO performance:

Lock-Up Period

The lock-up period is the time after the IPO when insiders (such as employees and early investors) are prohibited from selling their shares. This period typically lasts 180 days, with a minimum of 90 days per SEC law.

After the lock-up period expires, a "flood" of insider selling can put downward pressure on the stock price.

Waiting Periods

The SEC's "quiet period" regulations restrict a company's ability to promote its IPO in the weeks following the offering. As a result, there is typically a lull in news and excitement surrounding a company in the weeks before its IPO.

This can lead to lower than expected demand and poor performance on the first day of trading.

Flipping is the practice of buying shares in an IPO and then selling them immediately after the stock begins trading. This can lead to a decline in the stock price as demand from long-term investors is replaced by supply from flippers looking to make a quick profit.

Upcoming IPOs in 2024

In 2024, the financial sector is preparing for several significant initial public offerings (IPOs) that are poised to make a substantial impact on the market.

1. Skims Skims, founded by Kim Kardashian in 2019, is an innovative fashion brand known for its inclusive and body-positive approach to shapewear, loungewear, and intimates. The company has rapidly grown due to strategic social media marketing and celebrity endorsements, offering a diverse range of sizes and colors that appeal to a wide audience. Skims' successful blend of comfort and style positions it as a leader in the evolving fashion industry. Its potential valuation remains a point of interest for investors in its anticipated 2024 IPO. 2. Plaid Plaid is a prominent fintech company that provides infrastructure connecting financial applications with users' bank accounts. Known for its role in enabling data sharing between financial institutions and fintech apps, Plaid's services have become crucial for various financial platforms. Its trustworthiness, growth metrics, and ability to navigate regulatory environments make it an intriguing IPO prospect in 2024. 3. Discord Discord, founded in 2015, is a versatile digital communication platform offering text, voice, and video chat capabilities. Beyond gaming, it has attracted diverse online communities, positioning itself as a comprehensive communication tool. Discord's adaptability, user privacy focus, and financial performance have generated high anticipation for its 2024 IPO. 4. Chime Chime, established in 2013, is a fintech company that simplifies banking through a mobile-first platform, offering no-fee checking and savings accounts. Its innovative approach to online banking, user-friendly experience, and robust growth have made it a standout in the digital finance sector. Chime's IPO is expected to draw investor attention in 2024. 5. Turo Turo, founded in 2009, operates as a peer-to-peer car-sharing platform, disrupting traditional car rental services. By allowing private car owners to rent their vehicles, Turo offers diverse vehicle options and flexibility to renters. Its innovative approach to car sharing and market expansion make it a promising IPO candidate in 2024. While the outlook for IPOs in 2024 remains cautious due to macroeconomic uncertainties such as rising interest rates and potential recessions, these companies are expected to shape their respective industries with their unique business models, adaptability, and potential for growth. Each IPO presents distinct opportunities for investors looking to participate in the evolving landscape of public markets.

To stay updated on upcoming IPOs, check out an IPO calendar, which lists all of the upcoming IPOs. They can be found on many different websites, such as Yahoo! Finance and Nasdaq .

Another way to find out about upcoming IPOs is to sign up for email alerts from sites like IPO Monitor . This way, you will be among the first to know when a new IPO is announced.

The Bottom Line

An IPO can be an excellent way for a company to raise capital, but it also comes with some risks and drawbacks.

The advantages could include a large influx of cash for the company, increased visibility, and a boost in prestige.

The disadvantages could include giving up some control of the company, higher expenses , and greater scrutiny.

Before going public, a company should carefully consider the pros and cons of an IPO and ensure that it is the right move for the business.

Initial Public Offerings (IPOs) FAQs

Do ipos have a first come, first serve basis.

IPOs are not first come, first serve. Instead, they are allocated based on demand from investors.

Is investing in an IPO good?

There is no guaranteed answer, as it depends on the company and the market conditions at the time of the offering. IPOs tend to underperform in the short term but outperform over the long term.

What is the benefit of buying an IPO?

The primary benefit of buying an IPO is that you get in on the ground floor of a company with high growth potential.

How do you make money from an IPO?

You can make money from an IPO by buying shares at the IPO price and then selling them later at a higher price. During the first public offering, investors typically purchase firm shares at a price below the market price. Then, during the public auction, the value of the business's shares may increase. If the company is already well-established worldwide, its initial public offering may generate a frenzy and price surge.

Are IPOs high risk?

IPOs are considered high risk because the company has no track record, and its stock price can be unpredictable in the early days of trading.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

Related Topics

• Direct Listing
• Dutch Auction
• Follow-on Offering
• Follow-On Public Offer (FPO)
• General Public Distribution (GPD)
• How Do IPOs Work
• How to Buy IPO Stock
• Lock-Up Agreement
• Offering Circular
• Offering Price
• Overallotment
• Pre-Initial Public Offering (Pre-IPO)
• Secondary Offerings

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Initial Public Offering (IPO): A growth strategy for companies

A private company goes public when it lists its stock for the very first time in a stock exchange, where it can be bought and sold by the general public. This type of transaction is known as an Initial Public Offering, or IPO.

Going public is a growth strategy that many companies start considering at a certain point. It is a momentous decision for any company, with a far-reaching impact on everything from its organization to its daily operations, which entails a tremendous transformation effort and requires thorough planning and preparation.

• Corporate finance

The Corporate Finance business at BBVA excels in 2017

The Corporate Finance business at BBVA started 2017 in as good as shape as it ended last year. In 2016, BBVA closed 18 deals in Spain, 10 in Mexico and six in Latin America. The start of 2017 was very busy, and the Bank "hopes to once again be the bank with the most closed deals in its core markets, especially in Spain and Mexico."

There are two major reasons for going public: Being able to access capital markets to raise funds to expedite growth and build up the resources needed to develop a business plan; and allowing private shareholders to obtain liquidity, crystallize the value of their shares and diversify their assets. Sometimes, even a combination of both.

But there are other reasons why companies take on this transformational challenge: the company's desire to undertake an institutional process such as this; solidify the company’s relevance beyond its current shareholders; benefiting from the prestige and credibility boost that comes from the voluntary acceptance to abide by market rules before stakeholders; and obtaining an independent valuation of the company as a result of the ongoing scrutiny of its performance.

Additionally, creating a public market for the shares offers additional advantages for a company, and provides it with an additional set of tools. For example, after going public, securities can be leveraged to tackle potential strategic operations, or compensation schemes can be defined, linked to stock price trends, to incentivize the management teams.

What’s a company’s IPO process like?

Once a company decides to go public in a regulated market, it must take the correct steps to ensure the IPO can be successfully completed. These steps require working simultaneously at different levels:

• Defining an adequate equity story that develops an attractive investment proposal for investors based on an ambitious but credible business plan, with verifiable milestones and levers, as well as measurable objectives.
• Corporate Governance bodies must abide by market standards, essential to ensure that minority investor interests are adequately defended and the responsibilities of the Board of Directors clearly defined.
• Involvement of external players, whose contribution is crucial before, during and after the IPO: investment banks, law firms, auditors, etc. Investment banks, in particular, work on structuring the offer, which includes listing the company's stock in an exchange, the fine tuning and presentation of the equity story and marketing of the offering among potential investors.

Global Finance recognizes BBVA's investment banking business globally

Yet another year, BBVA was named best investment banking in Spain and Mexico by U.S. publication Global Finance Magazine. Also, for the first time, BBVA secured a spot in the 'Best investment bank' and 'Best bank for new financial technology' categories in Latin America, thanks to its technological efforts and significant advances in digital transformation.

• Defining the appropriate IPO structure, so that its size is attractive and the liquidity of the shares sufficient once they are listed; the balance of the company is consistent with its strategic plan and the Offering geared towards the right type of investor.
• Continuous monitoring of markets and other potential issues in the primary market while working on the IPO arrangements, which can take between 4 and 6 months, to decide which is the preferable window to launch the transaction publicly.
• "Price Discovery." Once the Offer has been launched, it is necessary to determine at what price are investors willing to buy shares and issuers to sell them, for which several phases are carried out with interactions with different market agents.  This process involves investment banks, who establish a preliminary valuation; equity analysts, who provide their own valuations based on the information provided by the company, and investors who have shown interest in participating in the IPO.

Once the IPO has been completed, the share’s price trends will reflect the perception that investors have of the company's performance, as it takes its first steps as a listed company, and starts complying with the new obligations and responsibilities that this entails.

BBVA is a benchmark in the Spanish capital market, having led more than 20 IPOs in the last decade and having played a pivotal role in the Spanish market’s privatization process in recent decades. Thanks to its proven track record, experience, and institutional distribution capability, the BBVA Equity Capital Markets team can guarantee excellence in the execution of equity offers.

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What is an IPO (Initial Public Offering)?

Reasons why companies go through an ipo, steps in an initial public offering (ipo), challenges from a public listing, company valuation, ipo underpricing, more resources, initial public offering (ipo).

The first sale of company shares to the public

An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Before an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family, and business investors such as venture capitalists or angel investors ).

When a company goes through an IPO, the general public is able to buy shares and own a portion of the company for the first time. An IPO is often referred to as “going public,” and the underwriting process is typically led by an investment bank .

Companies that are looking to grow often use an Initial Public Offering to raise capital. The biggest advantage of an IPO is the additional capital raised.

The capital raised can be used to buy additional property, plant, and equipment (PPE), fund research and development (R&D), expand, or pay off existing debt. There is also an increased awareness of a company through an IPO, which typically generates a wave of potential new customers.

The Biggest IPOs in the US:

• Alibaba Group IPO with US$21.8 billion raised (September 2014)
• Visa IPO with US$17.9 billion raised (March 2008)
• Facebook IPO with US$16 billion raised (May 2012)
• General Motors IPO with US$20.1 billion raised (November 2010)

In addition, private investors/founding partners/venture capitalists can use an IPO as an exit strategy. For example, when Facebook went public, Mark Zuckerberg sold nearly 31 million shares worth US$1.1 billion. A public offering is one of the most common ways venture capitalists make a significant amount of money.

The top reason to go public… to raise money!

The first step in an Initial Public Offering is to hire an investment bank , or banks, to handle the IPO. Investment banks can either work together with one taking the lead, or one bank can work alone.

Next, everyone involved in the IPO – the management team, auditors, accountants, the underwriting banks, lawyers, and Securities and Exchange Commission (SEC) experts – attend a meeting to discuss the offering and determine the timing of the filing . Similar meetings happen throughout the entire underwriting process.

After the meeting, due diligence is required to be conducted on the company to make sure the registration statements are accurate. Tasks include market due diligence, legal and IP due diligence, financial and tax due diligence .

The end result of the due diligence is the S-1 Registration Statement . The information in the statement includes historical financial statements, key data, company overview, risk factors, and more.

A pre-IPO analyst meeting is held after the S-1 Registration Statement is filed to educate bankers and analysts about the company. Bankers and analysts are also briefed on how to sell the company to investors. A preliminary prospectus can also be drafted.

Pre-marketing is conducted to determine whether institutional investors like the sector and the company and the price they would likely be willing to pay per share. In conjunction with the internal valuation, a price range for the offering is set by the banks. The S-1 Registration Statement is amended with the price range.

After the pre-marketing work and S-1 Registration Statement is completed, the management team travels around to meet with investors and market the company . It is a very important process as orders for the number of shares by investors and the price they are willing to pay are determined. The price range may be further revised.

The management team will meet with the investment banks to decide on the final price of the deal based on the orders . If there are a lot of orders (oversubscribed), the company will price the shares higher.

Once the IPO is priced, the investment banks will allocate shares to investors , and the stock will start trading in the market for the public to buy and sell.

Although there are benefits to going public, there are notable drawbacks to consider as well. An Initial Public Offering (IPO) can take anywhere from six months to a year. During this time, the management team of the company is likely focused on the IPO, creating a potential for other areas of the business to suffer.

In the United States, public companies are monitored by the Securities and Exchange Commission (SEC). Public companies are made up of thousands of shareholders and are subject to rules and regulations. A board of directors must be formed, and auditable financial and accounting information must be provided quarterly.

Going public is an expensive process, which is why, historically, only private companies with strong fundamentals and high profitability potential go through an IPO. Lastly, the information of a public company is readily available online, which may be useful to competitors.

Investment bankers spend a lot of time trying to value the company going public.  Ultimately it will be the investors who decide what the company is worth when they decide to participate in the offering and when they buy/sell shares after it starts trading on the exchange.

The main methods bankers use to value the company before it goes public are:

• Financial modeling (discounted cash flow analysis / DCF analysis)
• Comparable company analysis
• Precedent transaction analysis

By combining these three methods, bankers are able to triangulate on what they think is a reasonable value an investor would be willing to pay for the business.

Valuation can be more of an art than a science, and for this reason, many IPOs have a lot of volatility in their first few days of trading.

To learn more, check out CFI’s business valuation techniques course .

Despite all the valuation work mentioned above, there is still a tendency for IPO underpricing to occur when companies go public (i.e., they are intentionally priced significantly lower than what the first-day trading price will be). For example, LinkedIn Corporation went public at $45 a share but traded as high as $122 at day end. This is often referred to as “leaving money on the table.”

Underwriting a public offering can be disastrous for a company. Assume Company A prices its one-million share IPO at $20 a share. If the shares end up trading at $40 a share, this would indicate that Company A received $20 million (1 million * $20) when it could’ve made $40 million (1 million * $40) if the IPO was not underpriced.

A popular theory in corporate finance as to why IPOs are underpriced can be illustrated by the following example:

Assume there are two categories of investors who invest in an IPO – insiders and the rest of the market (outsiders). Insiders know the actual value of the company and would stay away if it is overpriced. If the IPO is underpriced, insiders will purchase the shares.

Outsiders do not know the actual value of the company but know that the insiders know. With this knowledge, outsiders would follow suit with the action of the insider:

• If the IPO is underpriced, everyone will buy shares.
• If the IPO is overpriced, the insiders won’t buy. Knowing this, the outsiders will also not buy into the offering.

Thus, it is in the best interest of the issuer and its bank to underprice the offering.

Thank you for reading CFI’s guide to Initial Public Offering (IPO). To keep learning and advancing your career, the following resources will be helpful:

• Equity Capital Markets
• Valuation Methods
• M&A Process
• Financial Modeling Guide
• See all valuation resources
• See all equities resources

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Where Have All the Chinese I.P.O.s Gone?

Chinese companies’ stock market listings once flooded Wall Street. These days, China’s initial public offerings are in a drought.

Credit... Ben Jones

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By Meaghan Tobin

Reporting from Taipei, Taiwan

• June 25, 2024

There was a time when a Chinese internet company’s initial public offering was the hottest thing on Wall Street.

As the e-commerce giant Alibaba prepared to go public on the New York Stock Exchange a decade ago, the world’s biggest banks competed fiercely to underwrite the offering. When the opening bell rang on Sept. 19, 2014, stock traders cheered, wearing hoodies in Alibaba’s signature orange over their suits. The I.P.O. raised $25 billion, the biggest listing ever at the time. Scores of other Chinese companies raised billions in the United States over the next few years.

Those days are firmly in the past. Wall Street has not seen anything close to a blockbuster Chinese I.P.O. in three years. In fact, the drought is getting worse. So far this year, Chinese companies have raised about $580 million in U.S. listings, almost all of it last month from one I.P.O. by the electric vehicle maker Zeekr.

As the geopolitical relationship between China and the United States has deteriorated, it has become increasingly difficult for Chinese companies to find a foreign market where a listing might not be jeopardized by political scrutiny.

Things are hardly looking better in China. As part of a push by Beijing to assert greater control over the Chinese market, regulators have made it harder to go public, drastically slowing the pace of domestic listings. Around 40 Chinese companies have gone public at home this year. They have raised less than $3 billion, a fraction of the value typically raised by this point in the year, according to data from Dealogic.

If the current pace continues, this year will bring the fewest Chinese initial public offerings worldwide in more than a decade.

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• Taking a Company Public

The Company’s Perspective

Is buying ipo stock a good idea, the bottom line.

• Stock Markets

The Road to Creating an IPO

• What Is an IPO? How an Initial Public Offering Works
• IPOs for Beginners
• Top 10 Largest Global IPOs of All Time
• Offering Definition
• Public Offering Definition
• Primary Offering Definition
• Secondary Offering Definition
• Underwriter Definition
• Pre-IPO Placement Definition
• Public Offering Price (POP) Definition
• Direct Public Offering (DPO) Definition
• IPO Lock-Up Definition
• Two Types of IPOs
• IPO vs. Private Placement: What's the Difference?
• What Is an IPO Lock-Up Period and How Long Is It?
• Three Phases of an IPO
• How to Track Upcoming Initial Public Offerings (IPOs)
• How an Initial Public Offering (IPO) Is Priced
• How Does an IPO Get Valued?
• The Ups and Downs of Initial Public Offerings
• The Road To Creating An IPO CURRENT ARTICLE
• Book Building Definition
• Roadshow Definition
• Quiet Period Definition
• New Issue Definition
• Underpricing Definition
• Greenshoe Option Definition and Example

Through an initial public offering (IPO), a company raises capital by issuing shares of stock, or equity, in a public market. Generally, an IPO is a company's first issue of stock. However, there are ways a company can go public more than once.

Issuing shares through an IPO is one of the primary reasons that stock markets exist. A company can raise capital for a variety of reasons, such as to fund its expansion, let early-stage investors cash out some of their investment, or create a currency (such as common stock) to acquire rivals.

The IPO process is referred to as the primary market as it enables investors to buy stock directly from the company. From then on, those shares exist in a secondary market , where investors trade among themselves with shares that have already been issued by the company.

• An initial public offering, or IPO, is the first chance most individual investors get to buy an ownership stake in a young company.
• For early-stage investors and insiders, it's a chance to cash in.
• For the company, it's an opportunity to raise money for development and expansion.
• In order to go public, a company must open its books to scrutiny by potential investors and financial regulators.
• The company's prospectus and its executive "roadshow" offer a fuller look at the company's plans and prospects.

The Process of Taking a Company Public

Getting a company through to its IPO takes time, is expensive, and must pass many regulatory hurdles. A very important component of going public is opening a firm’s books to public scrutiny, as well as the oversight of the Securities and Exchange Commission (SEC).  

Hire an Investment Bank/Underwriter

An investment banker, or underwriter , will help a company through this process, and the younger associates at an investment banking firm will bear the brunt of the grunt work. Those associates will spend many sleepless nights preparing a preliminary prospectus for the SEC and investors, which has come to be referred to as a red herring .

Prepare the Documentation

Through many revisions and discussions between the company and its bankers, the issuing company will finally create the final prospectus which is the formal legal document filed with the SEC that lets the IPO process go through. One of the most common prospectus documents is referred to as form S-1 , the formal registration statement under the Securities Act of 1933.  

Other “S” versions exist and refer to different securities acts, such as those related to investment trusts, employee plans, or real estate companies. The prospectus may sound dull and can include hundreds of pages of seemingly mundane and redundant information. However, it is extremely important for investors to understand what the company does, why it is issuing shares through an IPO, and what type of ownership structure is being offered.

Determine the Offer Price

The issuing company, along with the help of their underwriter, will determine the offering price of the shares. This step is absolutely critical, as it sets the market expectation for the initial marketing price offered to the public. The underwriters will analyze prior IPOs and analyze complex variables. At a high level, there are several factors that contribute to the offer price, including:

• The company's valuation involves looking at future expected financial performance including cash flow and future growth prospects.
• The company's comparable entities and their price-to-earnings multiple.
• Overall market conditions and what the sentiment of the stock market is.
• Investor demand based on feedback from investors and appetite for the specific industry.

Companies must determine how many shares to hold back and issue to executives, staff, or other internal personnel.

Perform the Roadshow

There will also be legal, accounting, distribution, and mailing, plus roadshow expenses that can easily total in the millions of dollars. A roadshow is just what it sounds like. It involves company executives, including the CEO, CFO, and investor relations representative, hitting the road to build enthusiasm for investing in the IPO and explain their motivations for doing so. A successful road performance can drive demand for the stock and result in more capital raised.

In rarer circumstances, a roadshow can have the opposite effect. Back when Groupon went public, it came under fire from the SEC for an accounting term referred to as “Adjusted Consolidated Segment Operating Income."

The SEC, as well as other investors, questioned the manner in which it adjusted for marketing and advertising expenses and called into question how fast the company could grow or generate ample profits in the future.

There are also certain documents used to share information to investors to educate and market the shares. A tombstone refers to a summary advertising document that underwriters issue to prospective investors (and sometimes themselves to commemorate that the IPO process has been completed). It summarizes a prospectus and briefly introduces a company.

Choose the Exchange

A stock exchange, such as the New York Stock Exchange (NYSE), can help the process and indicate what an opening price on the IPO day is likely to be.  Market makers and floor brokers help in this process, as does the syndicate of underwriters, to gauge the overall level of investor interest.

Deciding which exchange to use is also of the utmost importance. Most firms would prefer the NYSE or NASDAQ markets given their ability to transact billions of dollars of daily trading activity and a solid guarantee of market liquidity, trading execution, and follow-up reporting.

List the Shares

To finally list the shares, the company must choose the specific stock exchange it wants to list on. That exchange will have a list of requirements the company must meet; these requirements range from revenue and earnings amounts to market capitalization. The exchange may also impose governance and compliance standards.

The company must submit an application to an exchange which provides relevant and required information to the exchange. The exchange will review the potential listing which may take weeks to months. The process may be shortened or extended based on the specific exchange and the complexity of the company's business.

Pay IPO Fees

PwC, the professional services company, provides a summary of costs that a company can expect to incur to go public. It also illustrates the steps needed to complete an IPO. 

For starters, the underwriters, which generally include a lead underwriter and multiple other underwriters (also referred to as the sell-side firm and the lead “ book runner ” with co-managers), can take a cut of 4% to 7% of the gross IPO proceeds to distribute shares to investors.

For example, Goldman Sachs   (NYSE: GS) was X Corp.'s (NYSE: TWTR) lead underwriter when X Corp. went public in 2013. Together with other underwriters including Morgan Stanley (NYSE: MS) and JPMorgan   (NYSE: JPM), they shared about $59.2 million, 3.25% of the $1.82 billion that X Corp. raised in its IPO, for managing the sale.

In addition to the cost considerations, a company must make many changes to survive when public. The prospectus stipulates many of the new financial, regulatory, and legal burdens, and PwC estimates that there are between $1 million and $1.9 million in additional ongoing costs to the average firm that goes public.

Hiring and paying a board of directors, or at least a higher profile board, can be expensive. Sarbanes Oxley regulation also imposed cumbersome duties on public companies that must still be met by most larger firms. Learning to deal with analysts, holding conference calls, and communicating with shareholders may also be a new experience.

Some investors get over-enthusiastic about the latest "hot" IPO. It might be smarter to wait to buy until it cools off a bit.

For investors in general, it pays to be careful when investing in an IPO . Most importantly, the company and underwriters have control over the timing of an IPO and will try to take the firm public under the most opportune circumstances. This could include timing it for a rising or bull market, or after the firm posts very favorable operating results.

A higher price is great for the company and bankers, but it can mean the investment potential in the future is less bright. The shares of many companies surge above the IPO price during the first day of trading, particularly those considered "hot."

The Waiting Option

A better strategy to consider may be to buy into an IPO later in the secondary market after the excitement has died down. A stock that falls in value following an IPO could indicate a pricing miscue by the underwriter, or potentially a lower price to invest in a solid company.  

An IPO usually refers to selling shares to the public for the first time. But a company can be taken private (such as by a private equity firm) and then be taken public again, which is also an IPO. This has occurred with Burger King several times.

What Is the Downside for a Company to Go Public?

When a company goes public, the founders may lose control of their company. Once the company is public, ownership is distributed to more shareholders; therefore, it is important the company has a clear vision for the company and is able to communicate those plans as there is no longer a more narrow structure for decision-making.

Do All IPO Stocks Go Up?

No, IPO stocks may not be priced appropriately or the market may simply not have an appetite for the shares. For this reason, like any other equity, it is possible for an IPO stock to drop upon issuance. This means that the the price of an IPO stock may end its first day lower than the offer price when it was brought to market that morning.

How Soon Can I Sell Shares After an IPO?

Once share are listed on a public exchange, an investor often can trade or sell shares of stock at any time. Certain employees may need to meet vesting requirements to have shares issued to them. However, there are very little hurdles to meet once shares are listed on an exchange.

What Is the Three Day Rule for IPOs?

The SEC does have a rule that notes shares will not transfer to a new owner until three days after stock ownership has been traded. Shares impacted by this rule make take a few additional days for a stock trade to fully settle.

Since capitalism has existed, investing in public companies has been an engine of capitalism that lets individuals invest in large firms that have created vast wealth for shareholders.

The process is complex, and investors need to be aware of IPO timing. But understanding the road to an IPO can be lucrative for companies, underwriters, and investors alike.

U.S. Securities and Exchange Commission. " Going Public ."

PwC. " Roadmap for an IPO: A Guide to Going Public ," Page 60.

U.S. Securities and Exchange Commission. " SEC Form S-1 IPO Investment Prospectus ."

U.S. Securities and Exchange Commission. " List of SEC Form ."

U.S. Securities and Exchange Commission. " Investing in an IPO ," Page 1.

Harvard Business Review. " Groupon Doomed by Too Much of a Good Thing ."

PwC. " Considering and IPO to Fuel Your Company's Future? "

Dow Jones. " Goldman to Get 38.5% of Twitter IPO Fee Pool ."

U.S. Securities and Exchange Commission. " Initial Public Offerings, Why Individuals Have Difficulty Getting Shares ."

Forbes. " Why Burger King Will Soon Go Private...Again ."

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Reporting by Byron Kaye; Editing by Jacqueline Wong

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Stocks dip as investors digest inflation data; dollar dips

Global stock indexes edged lower on Friday, reversing early gains, while Treasury yields rose and the U.S. dollar declined as investors absorbed data that showed U.S. monthly inflation was unchanged in May.