Initial Public Offering is a pathway that private companies use to become public entities. In this case, a private entity issues shares to the public in what is often referred to as new stock issuance. The issuance allows the private entity to raise capital from public investors, consequently get its stock listed in a market exchange such as the NASDAQ, New York Stock Exchange, among others.
The transition from a private entity to a public entity comes with its synergies. For starters, private investors who held stakes in a company prior to its transition, get to realize gains from their investments fully. The IPO price is normally configured in such a way that private investors get to recoup their investments in addition to a premium.
Initial Public Offering also provides public investors with an opportunity to invest in a company showing tremendous prospects. By participating in the offering, public investors gain exposure as well as an opportunity to enjoy share price increase, among other offerings such as dividends.
A company intending to go public will start by selecting an underwriter that will facilitate the entire listing process. A company may choose one or several underwriters to manage the different parts of the IPO process. Underwriters advise and fund the whole IPO process. They may also guarantee the entire IPO by purchasing the entire offering and selling right back to the public.
Underwriters compile all information regarding the company looking to go public. Once all the information is compiled, an S-1 Registration Statement is filed. The filling consists of a prospectus, which details all information about the IPO right from the IPO date.
Once all the necessary regulatory filings are made, underwriters and company executives start to market the share issuance in a bid to estimate demand that goes in determining the final offering price. It is at this stage that the underwriters can change the IPO price or issuance date.
The private company must also hire a third-party accounting firm to conduct a complete audit of its finances before going public. The audit report makes it possible for would-be investors to make informed decisions.
Once everything is settled, the IPO goes forward as per the date as well as price, allowing a company to receive capital from the primary issuance to shareholders. A company is not obliged to post 100% of its equity to the public. Instead, it can sell as little or as much control as it wishes.
Profit from the sale of shares to the public depends on the agreement signed between the company and the underwriter. In case of a firm commitment, then all proceeds from the share issuance go to the underwriter. If not then all the proceeds go to the company
Once a company goes public, it must adhere to disclosure requirements touching on finances, taxes liabilities as well as business operations.