Initial Public Offering (IPO)

What is an IPO?

An Initial Public Offering is the process of offering shares of a private organization to the public in a new stock issuance, allowing the company to raise capital from public investors. The period of transitioning from a private to a public company is very important as private investors tend to fully realize gains from their investments as share premiums are using offered to the current private investors.

In planning an IPO, a company usually select underwriter(s), choose an exchange platform and then trading the stocks publicly.

The history of Initial Public Offerings can be traced back to decades ago. The first Initial Public Offering was conducted by the Dutch. They did this by offering shares of the Dutch East India company to the public. Since then, IPOs have been used as an opportunity for companies to raise capital from public investors via the issuance of public share ownership. In 2008, the number of IPOs were relatively less than other years due to the financial crises that occurred at the time. Recently, much has been heard of IPOs as it has moved to focus on startup companies that have reached privates valuations of more than $1 billion.

How IPOs work

Before a company files an IPO, it is known as a private company consisting of a small number of shareholders and early investors like the founders, family, friends and professional investors (i.e venture capitalist or angel investors). When a company becomes mature (usually with a valuation of $1 billion) and meet the requirement of the Securities and Exchange Commission (SEC) and that of public investors, it makes known its interest to go public. Going public enables the company to grow, expand and borrow funds, due to the increased transparency and share listing credibility. The private companies usually hire the services of investment banks to study the demand, set the IPO time, date and others. An IPO consists of two parts; the first is the premarketing stage, while the second is the main initial public offering.

According to Investopedia, the Sequence of setting up an IPO include:

• Underwriters present proposals and valuations comprising the security type, offering price, number of shares, date and time.

• The firm selects underwriters under formal agreements.

• IPO teams comprising of underwriters, lawyers certified public accountants and SEC experts are formed.

• Compilation of company information needed for IPO launch.

• Materials needed for the marketing of the new stock issuance are created.

• The company puts in place reporting auditors, for reporting auditing and accounting information quarterly.

• The company issues its shares on the set IPO date.

Advantages of IPOs

• The company gets an opportunity to raise capital for the business.

• The company gets access to investment from the public.

• IPOs facilitates easier acquisition of deals.

• The increased transparency usually helps the company to receive favourable credit borrowing.

• It offers the company an opportunity to raise additional funds in the future through secondary offerings as it already has access to the markets.

• IPOs can offer a company a lower cost of capital for both equity and debt.