Key takeaways for “The Process Of Creating An IPO”:
- Benefits of a successful share offering
- Types of IPO’s
- The complex process of an IPO
The Process Of Creating An IPO
Every financial asset investor in the world knows the term, Initial Public Offering, or IPO. The complicated process of creating an IPO requires capital and time. Skilled Investment bankers are required, along with expert regulatory accountants, to pass the myriad of governmental directives.
Growing companies must balance a fine line when deciding to trade their stock on the open market. Complex issues are evaluated before company founders can give the go-ahead. The company, its creators, and employees will enjoy many benefits of a successful share offering.
- The company gains additional capital for growth without the risk of debt when creating an IPO.
- Improved net-worth and debt-to-equity ratios give the company a better ability for Financing capital improvements. If the company performs well, it can return to the market and sell additional shares for cash.
- Company founders achieve higher personal liquidity.
- If growth through acquisition is a strategic business plan, the company can keep its cash position and finance purchases by stock.
- Companies can foster a successful positive image as a public company.
The complexity of creating an IPO takes years for some companies, while other firms require only a few weeks. Timing to offer shares on the open market is a critical step. Founders must also determine the right market for their company, either the NYSE or NASDAQ offers market liquidity, follow-up reporting, and solid trade executions.
There are two types of Initial Public Offerings:
- Fixed Price: The company decides on a fixed share price before the public IPO. Investors can take part in the offering, knowing the initial range of share pricing.
- Book Building Offering: The company sets a 20% price range or band for investors to bid on. Investors decide on the number of shares for their bid before underwriters set the final share price.
Once the founders have taken the company public, they must hire an investment bank to handle the underwriting process. Depending on the size of the IPO, additional investment banks can be used to spread the risk.
The Process of an IPO:
- Founders of the company must hire an investment bank to underwrite the IPO. The company opens its books to the underwriter in preparation of scrutiny by the Securities and Exchange Commission or SEC. The investment bank underwriters perform several valuable tasks. 1) Investment bank underwriters work with the IPO company personnel, to make sure the company meets all regulatory requirements. 2) Underwriters gauge interest from mutual funds and institutional investors to set an initial price for the public offering. 3) Guarantees are established for the number of shares to be sold and the purchase of any surplus. 4) Underwriters prepare an initial prospectus, sometimes called a Red Herring, for submission to the SEC, before proceeding with the offering.
- The company and its investment banks, negotiate the IPO. Accountants have documented a majority of pertinent information and market sentiment. The deal must be structured correctly to determine how much cash to raise, and what types of securities to be issued. An underwriter can structure the IPO in one of two ways 1) A firm commitment of how many shares will be sold and the exact amount of cash to be raised for the company. 2) Or, they establish the best effort agreement, in which the underwriter sells the securities but does not guarantee an amount of money.
- At this stage of the process, IPO underwriter’s file registration agreements to the SEC. The most basic form is the S-1. This initial statement includes company financial statements, founder and management backgrounds and information relevant to the IPO, such as legal issues. Company investment trusts, employee plans, and pertinent real estate information are disclosed.
The Securities and Exchange Commission starts its verification process to make sure the documentation is true and correct. Any needed additional documentation is requested and verified. The SEC then sets a preliminary date to sell shares to the public.
At this point, founders begin to realize they will have instant wealth, and their company will have market valuations in the billions.
Several actions are happening during this cooling-off period in which the SEC is verifying each statement in the Red Herring for accuracy. Underwriters and company owners are generating interest to institutional investors. The company is selling itself, management structure, and making sure potential stockholders understand why the business is a good investment.
Companies are adjusting to becoming a public company. Company founders hire a board of directors, while financial and regulatory burdens are forecast and put in place. After extensive negotiations and re-submissions of documentation, a final prospectus is submitted to the public, and the initial offering share price is set.
Once the SEC has approved the final prospectus, the IPO date is determined. IPO underwriters distribute shares to NASDAQ market makers or NYSE floor brokers.
Company shares are available to the public.
If you have any questions about IPO’s, please feel free to contact us.