INVESTOR’S GUIDE IN JAIPUR (IPO)
It has been a lot of time since when IPO was and still in action. It may be hard to recognise it. But the big trader uses it for sure.
Let’s see what an IPO is?
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering.
How an Initial Public Offering (IPO) Works
Prior to an IPO, a company is considered private. As a private company, the business has grown with a relatively small number of shareholders including early investors like the founders, family, and friends along with professional investors such as venture capitalists or angel investors.
When a company reaches a stage in its growth process where it believes it is mature enough for the rigors of SEC regulations along with the benefits and responsibilities to public shareholders, it will begin to advertise its interest in going public.
Typically, this stage of growth will occur when a company has reached a private valuation of approximately $1 billion, also known as unicorn status. However, private companies at various valuations with strong fundamentals and proven profitability potential can also qualify for an IPO, depending on the market competition and their ability to meet listing requirements.
An IPO is a big step for a company as it provides the company with access to raising a lot of money. This gives the company a greater ability to grow and expand. The increased transparency and share listing credibility can also be a factor in helping it obtain better terms when seeking borrowed funds as well.
IPO shares of a company are priced through underwriting due diligence. When a company goes public, the previously owned private share ownership converts to public ownership, and the existing private shareholders’ shares become worth the public trading price.
Share underwriting can also include special provisions for private to public share ownership. Generally, the transition from private to public is a key time for private investors to cash in and earn the returns they were expecting. Private shareholders may hold onto their shares in the public market or sell a portion or all of them for gains.
Meanwhile, the public market opens up a huge opportunity for millions of investors to buy shares in the company and contribute capital to a company’s shareholders’ equity. The public consists of any individual or institutional investor who is interested in investing in the company.
Overall, the number of shares the company sells and the price for which shares sell are the generating factors for the company’s new shareholders’ equity value. Shareholders’ equity still represents shares owned by investors when it is both private and public, but with an IPO the shareholders’ equity increases significantly with cash from the primary issuance.
History of Initial Public Offerings (IPOs)
The term initial public offering (IPO) has been a buzzword on Wall Street and among investors for decades. The Dutch are credited with conducting the first modern IPO by offering shares of the Dutch East India Company to the general public. Since then, IPOs have been used as a way for companies to raise capital from public investors through the issuance of public share ownership.
Through the years, IPOs have been known for uptrends and downtrends in issuance. Individual sectors also experience uptrends and downtrends in issuance due to innovation and various other economic factors. Tech IPOs multiplied at the height of the dot-com boom as startups without revenues rushed to list themselves on the stock market.
The 2008 financial crisis resulted in a year with the least number of IPOs. After the recession following the 2008 financial crisis, IPOs ground to a halt, and for some years after, new listings were rare. More recently, much of the IPO buzz has moved to a focus on so-called unicorns; startup companies that have reached private valuations of more than $1 billion. Investors and the media heavily speculate on these companies and their decision to go public via an IPO or stay private.
Underwriters and the Initial Public Offering (IPO) Process
An IPO comprehensively consists of two parts. The first is the pre-marketing phase of the offering, while the second is the initial public offering itself. When a company is interested in an IPO, it will advertise to underwriters by soliciting private bids or it can also make a public statement to generate interest.
The underwriters lead the IPO process and are chosen by the company. A company may choose one or several underwriters to manage different parts of the IPO process collaboratively. The underwriters are involved in every aspect of the IPO due diligence, document preparation, filing, marketing, and issuance.
Steps to an IPO include the following:
- Underwriters present proposals and valuations discussing their services, the best type of security to issue, offering price, amount of shares, and estimated time frame for the market offering.
- The company chooses its underwriters and formally agrees to underwriting terms through an underwriting agreement.
- IPO teams are formed comprising underwriters, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts.
- Information regarding the company is compiled for required IPO documentation.
a. The S-1 Registration Statement is the primary IPO filing document. It has two parts: The prospectus and the privately held filing information. The S-1 includes preliminary information about the expected date of the filing. It will be revised often throughout the pre-IPO process. The included prospectus is also revised continuously.
- Marketing materials are created for pre-marketing of the new stock issuance.
a. Underwriters and executives market the share issuance to estimate demand and establish a final offering price. Underwriters can make revisions to their financial analysis throughout the marketing process. This can include changing the IPO price or issuance date as they see fit.
b. Companies take the necessary steps to meet specific public share offering requirements. Companies must adhere to both exchange listing requirements and SEC requirements for public companies.
- Form a board of directors.
- Ensure processes for reporting auditable financial and accounting information every quarter.
- The company issues its shares on an IPO date.
a. Capital from the primary issuance to shareholders is received as cash and recorded as stockholders’ equity on the balance sheet. Subsequently, the balance sheet share value becomes dependent on the company’s stockholders’ equity per share valuation comprehensively.
- Some post-IPO provisions may be instituted.
a. Underwriters may have a specified time frame to buy an additional amount of shares after the initial public offering (IPO) date.
b. Certain investors may be subject to quiet periods.
Corporate Finance Advantages of an Initial Public Offering (IPO)
The primary objective of an IPO is to raise capital for a business. It can also come with other advantages.
The company gets access to investment from the entire investing public to raise capital.
Facilitates easier acquisition deals (share conversions). Can also be easier to establish the value of an acquisition target if it has publicly listed shares.
Increased transparency that comes with required quarterly reporting can usually help a company receive more favorable credit borrowing terms than as a private company.
A public company can raise additional funds in the future through secondary offerings because it already has access to the public markets through the IPO.
Public companies can attract and retain better management and skilled employees through liquid stock equity participation (e.g. ESOPs). Many companies will compensate executives or other employees through stock compensation at the IPO.
IPOs can give a company a lower cost of capital for both equity and debt.
Increase the company’s exposure, prestige, and public image, which can help the company’s sales and profits.
Frequently Asked Questions
What is the purpose of an initial public offering (IPO)?
An IPO is essentially a fundraising method used by large companies, in which the company sells its shares to the public for the first time. Following an IPO, the company’s shares are traded on a stock exchange. Some of the main motivations for undertaking an IPO include: raising capital from the sale of the shares, providing liquidity to company founders and early investors, and taking advantage of a higher valuation.
Can anybody invest in an IPO?
Oftentimes, there will be more demand than supply for a new IPO. For this reason, there is no guarantee that all investors interested in an IPO will be able to purchase shares. Those interested in participating in an IPO may be able to do so through their brokerage firm, although access to an IPO can sometimes be limited to a firm’s larger clients. Another option is to invest through a mutual fund or other investment vehicle that focuses on IPOs.
Is it good to buy IPO shares?
IPOs tend to garner a lot of media attention, some of which is deliberately cultivated by the company going public. Generally speaking, IPOs are popular among investors because they tend to produce volatile price movements on the day of the IPO and shortly thereafter. This can occasionally produce large gains, although it can also produce large losses. Ultimately, investors should judge each IPO according to the prospectus of the company going public, as well as their individual financial circumstances and risk tolerance.
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