What is an IPO?
Some of the biggest, hottest brands and businesses are tapping into the public markets in 2019. But before a company can offer shares to investors on the open market, it needs to go public. To go public, it needs to put together an IPO. What is an IPO and what does IPO stand for? An initial public offering (IPO) is the first step in allowing everyday investors to purchase shares of a newly public company.
The IPO process is much more involved than just picking a stock ticker and setting a share price. There’s an extensive process involved in getting the company ready for life on the public markets. Here’s a peek into what an IPO is and how the process of an initial public offering works.
Underwriting the IPO
When a company reaches a point where it believes it can comply with Securities and Exchange Commission (SEC) regulations, it may decide to go public to access investor capital. Before anyone can invest, the company needs to have its IPO underwritten. This process is extremely involved and includes steps like:
- Determining valuation
- Determining securities and share structure
- Setting an offering price
- Figuring out the number of shares
- Plotting the time frame of the IPO
Underwriters compile all this information into formal documentation. Most notable is an S-1 Registration Statement. Eventually, public investors will have access to the company’s S-1, which includes a prospectus and relevant financial information ahead of the initial public offering. The S-1 is revised throughout the underwriting process.
Forming the Board of Directors
If a private company doesn’t already have a board of directors, it will need to form one. Public companies often have a diverse board of directors. They help to ensure the business operates in the best interest of shareholders. The board should include tenured company executives, members of private investment groups, and other individuals with ingrained knowledge of the business or the authority to make executive decisions. Board size depends on the size of the company.
The Road Show Pitch
With the S-1 drafted, the company will begin marketing itself to institutional investors ahead of the IPO debut. Marketing materials are created to outline important aspects of the offering and give the IPO definition. Some things a company will present include:
- Near-term financial outlook
- Reasons for IPO
- Potential for growth
- Information about board of directors and private investment interests
The goal is to drum up excitement among institutional investors. It help ensure the success of the IPO when it becomes available on a public exchange. The road show also serves to introduce members of the board to fund managers.
The Initial Public Offering
After a road show, the company will have a good sense of how ready its initial public offering is. If institutional investors are eager, there’s a good chance the public markets will follow their lead. The company will select the exchange it wants to debut on, set the price per stock, and set the IPO date.
On the IPO date, any investor is able to purchase stock on the public exchange. As the stock trades, its share price will adjust like any other ticker on the market. From there, it’s off to the races!
The next few weeks are crucial for the newly public company. But, if all goes well, in a few years the share price should be thriving behind good company performance. Just look at how well companies like Apple, Microsoft and Amazon have done since their IPO days. These big tech stocks were the first public companies to reach $1 trillion market caps.
Getting in at the Ground Floor
How does an IPO work? It’s the complex process of bringing a private company to the public markets. There are many, many steps between deciding to go public and actually listing the company on an exchange. The steps outlined above are the biggest ones – and even they are incredibly complex. There’s a lot that goes into getting a company ready, getting registered with the SEC and ensuring the initial public offering debuts successfully.
Understanding the IPO process can give investors better insight into what companies go through before they hit the public markets. It’s a great way to learn more about a company’s behavior as it positions itself for an initial public offering.
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