After the company and investment bank agree to an underwriting deal, the bank puts together a registration statement to be filed with the SEC. This statement has detailed information about the offering and company info such as financial statements, management background, any legal problems, where the money is to be used, and who owns any stock before the company goes public.
The SEC will investigate the company to make sure all the information submitted to it is correct and that all relevant financial data has been disclosed. A bank or group of banks put up the money to fund the IPO and 'buys' the shares of the company before they are actually listed on a stock exchange. The banks make their profit on the difference in price between what they paid before the IPO and when the shares are officially offered to the public. Competition among investment banks for handling an IPO can be fierce, depending on the company that's going public and the money the bank thinks it will make on the deal.
To try and drum up interest in the IPO, the underwriter takes the prospectus and presents it to prospective investors. This is what's called a road show. These can be trips around the world — thus the name road show — or can be video or internet presentations.
If a prospective investor likes the IPO, underwriters can legally offer them shares at the price they eventually set before the stock is listed on an exchange. This is called IPO allocation. Road shows are usually for the bigger institutional investors like pension funds, rather than an individual investor. As the IPO date comes closer, the underwriter and company decide on the price. This can depend on the company, the success of the road show and current market conditions. That's because it could lead to more trading and future business from other IPOs.
Johnson, Ph. Alternatively, investors in more established private companies that are going public also may want the opportunity to sell some or all of their shares. While going public might make it easier or cheaper for a company to raise capital, it complicates plenty of other matters. There are disclosure requirements, such as filing quarterly and annual financial reports. They must answer to shareholders, and there are reporting requirements for things like stock trading by senior executives or other moves, like selling assets or considering acquisitions.
Like everything in the world of investing, initial public offerings have their own special jargon. Many well-known Wall Street investors leverage their established reputations to form SPACs, raise money and buy companies. Some disclose their intention to go after particular kinds of companies, while others leave their investors entirely in the dark.
Many private companies choose to be acquired by SPACs to expedite the process of going public. In the first three weeks of , 56 U. SPACs went public.
IPO activity was significantly higher in , hitting levels higher than in 16 of the previous 20 years. To help combat this, s tartups like Robinhood and SoFi now enable retail investors to access certain IPO company shares at the initial offering price. As with any type of investing, putting your money into an IPO carries risks—and there are arguably more risks with IPOs than buying the shares of established public companies.
Take Lyft, the ride-share competitor to Uber. Other companies do well over time, but stumble out of the gate. Conversely, a company might be a good investment but not at an inflated IPO price. Yes, you may see slightly higher highs with IPO ETFs than with index funds, but you also may be in for a wild ride, even from one year to the next.
According to Fidelity, between and , one-year U. I'm a freelance journalist, content creator and regular contributor to Forbes and Monster.
Find me at kateashford. Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates. Some of key questions which we continue to deal with management in the boardroom pertain to why go public with an IPO, which is the right market to list it and what it takes to make it successful Management needs to consider several matters before rolling out an IPO.
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