Initial Public Offering Basics For New Investors

Taking a privately held company public is done via an IPO (Initial Public Offering). It wouldn’t be an overstatement to say that an IPO is one of the important events in a company’s timeline. The company issues a specific number of share certificates at a stated price. Each shareholder then becomes part owner of the company, and each share can be bought or sold on the stock market where the company is listed.

It is an extremely complicated process with a maze of regulatory and compliance requirements. But the benefits, in terms of finance, are just as high. A successful and well-subscribed IPO can instantly turn a small regional company into an international corporate heavyweight.

The biggest benefit of an IPO is obviously the massive infusion of capital for financing ongoing operations and planned expansion of the business. It improves the company’s liquidity position and helps reduce debt. There is also a big uptick in brand recognition and trust in the company’s products and services.

To begin with, a registration statement is filed with the SEC along with a prospectus for the IPO. This details everything an investor would like to know about the company and its future plans. This is where the underwriters come into the picture.

Underwriters and the company’s accountants are required to work together to fulfill these regulatory requirements. They will provide the management with advice on shifting from a private decision making process to a public company answerable to the board and shareholders. The most important thing the underwriters do is help decide the price and number of shares that the market can absorb.

There are significant post-IPO reporting and disclosure requirements for public companies. Publishing quarterly financial results and holding an annual shareholder meeting are two such examples. One big area where change is almost inevitable after an IPO is the management. Every company that goes public ends up hiring new executives who have experience in managing large public companies.

The success of an IPO is mainly based on how sound the finances, growth prospects and revenue model, not to mention the viability of the sector the company belongs to. But many IPOs have crashed and burned even with all this. Reasons why an IPO might fail include bad timing, over-pricing and/or too big a size, and choosing the wrong market.

In Canada, for example, IPOs tend to be smaller than the ones in the US. They are also slightly under-priced because the market doesn’t have the same strong appetite for risk. European IPOs have to look at a lot more factors and have a smaller window, since problems in any EU member nation can affect markets in all the other nations.

Before 2001, when dotcoms were still in vogue, anyone with a website could file for an Initial Public Offering and watch the millions piling up as the markets kept going up. What investors want now is a safe company with lots of assets to its name and long term growth prospects. For any business that can traverse this long road to IPO success, there’s a huge reward waiting at the other end.

In order to grow and expand, many companies will go through the IPO How process and make an Initial Public Offering (IPO) to the general public. A new IPO Prospectus valuation is usually made, and Canadian IPOs are becoming more common nowadays.