IPO: The Process of a Private Company Going Public

by Stock Market News | Apr 10, 2024 | 0 comments

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An Initial Public Offering, IPO — Ever Heard of it?

Getting in on the ground floor of a booming business is one of finance’s greatest achievements. And with an Initial Public Offering (IPO), that’s exactly what companies try to accomplish. The entire process revolves around offering up a company’s shares to the public for the very first time. So when you see those stock symbols for businesses you never even knew existed, know that they’re no longer privately owned and are now open to your investments. This action isn’t just about money though, but also development and advancements in growth and visibility. In other words, this is how a company becomes publicly traded.

What is an Initial Public Offering (IPO)?

If you’ve never heard of this before, here’s how it works: An IPO is what happens when a private company offers up its shares as a new stock issuance. It might be hard to wrap your head around at first, so think about it like this; That moment when you hear “new phone number” followed by that long string of digits, well these are companies’ version of that announcement. They’re getting ready to raise capital from investors, grow themselves bigger than ever before and help their names circulate around more mouths than just their own.

Pre-IPO Path

1. Deciding to Go Public

Before anything else though, there must be a mutual understanding from everyone involved in launching an IPO as to why they’re doing it in the first place. There are many reasons why a company would want to go public—opening doors for capital and providing liquidity options for other investors as well as employees—but until all parties agree on what needs changing or advancing within their business plan or profile, not much else can move forward.

2. Putting Pen-to-Paper

Once everyone’s on the same page, a company can then move forward with choosing an underwriter to guide their every step. An investment bank is usually the go-to for this position because they have a knack for pinpointing everything that needs to be done and when it should be completed by. Financial valuation, regulatory compliance and even just getting the word out about the IPO are all things that these underwriters are responsible for.

3. Regulatory Compliance and Documentation

There isn’t just one way to play this game, but there are many steps that need to be taken before the world can know what companies will become publicly traded. All of them involve transparency and market integrity though, so best believe everything is above board.

4. Prepping to Comply

Before diving head first into paperwork, a company has some prep work they need to take care of. They have to make sure that their internal controls, accounting policies and corporate governance practices meet exactly what’s required by regulatory standards. This includes:

Putting financial reporting rules in place: So that every disclosure made is not only accurate but timely as well.
Adopting corporate governance practices: This mostly involves putting together a team of independent members who can help audit other teams’ work or get compensation efforts moving.
Understanding Risks: Knowing what could potentially happen in terms of operations, finance and legality allows you to have a plan in action before you ever need it.

5. Recording Everything

Once all boxes are checked from step 1, it’s time for companies to dive deep into filing documents. And no filing system works better than Form S-1 (at least in the United States). This document gives lots of details without giving away too much confidential information including:

Propsectus: This public document does most of the heavy lifting when it comes to getting people interested enough in investing money. It’ll give you detailed information about business models, financial backgrounds, management teams and any risks that might be involved in your investment.
Audited Financial Statements: These are financial documents that have been looked over by a third party accounting firm. It includes things like balance sheets, income statements, and cash flow statements for the previous three years.
Management Discussion and Analysis (MD&A): This one’s a little more complex but it just means offering management’s perspective on the financial condition and operational results.
Description of Securities Being Offered: What kind of shares they’re selling, how many, etc.
Legal Proceedings and Regulatory Matters: Just any legal or regulatory issues that the company might be facing.

6. The SEC Review Process

I’m not going to lie this part is pretty boring but it’s important so here we go. After everything is submitted, the SEC takes a look at it to make sure everyone is playing fair. They’re looking out for compliance with its rules and to make sure all material information has been disclosed. This process involves:

Initial Review: The SEC staff examines the registration statement for any deficiencies or areas requiring further explanation.
Comment Letters: The SEC issues comment letters to the company, highlighting areas of concern or requesting additional information.
Amendments to the Registration Statement: In response to SEC comments, the company may need to amend its registration statement, providing further details or clarifying information.

7. Achieving Compliance

This part should really be called “Jumping Through Hoops.” All joking aside this is where you address all of the SEC’s concerns until they’re satisfied with your answers. So if you were hoping they would ask some easy questions that’s not gonna happen here. Once they think you’ve done enough you can move on!

8. Effectiveness and the Final Prospectus

Now we’re getting somewhere! Once your work has been approved by our friends at the SEC we can finally start selling some stocks! At this point there will be a final prospectus that we’ll have to go through. This will include the final terms of the offer, the price, and how many shares there will be.

9. Marketing the IPO: The Roadshow

Who doesn’t love a good road trip? Now we can finally start pumping up this listing and build some excitement around it. We will get to meet potential investors in person and try to gauge their interest in our little venture!

10. Pricing and Allocation

After all that hard work now it’s time to figure out how much money you’re going to make off of us! This step is crucial because it sets the price per share based on demand, company valuation, and market conditions. It also determines how much capital we’ll raise through this process.

11. Allocation of Shares

Now the fun part begins where everyone gets a little cut! But not too much… Institutional investors are probably going to take a lot of these shares but we’ll hold some back for individual investors as well!

12. The IPO Launch: Going Public

It’s actually pretty self-explanatory when you think about it. This is just what they call it when your shares become available on a stock exchange.

Life After the IPO

1. Increased Scrutiny and Transparency

Now that you’re officially out here you have to play nice with all of your new friends. You’ve got investors, analysts, regulators, etc. all looking at you under a microscope so it’s important that you adhere to stringent reporting requirements.

2. Opportunities and Challenges

You know what they say “mo’ money mo’ problems.” That might sound cliche but I truly believe that going public opens up new opportunities for growth but also puts more pressure on hitting quarterly earnings targets.

The Initial Public Offering, or IPO, represents a historic time for a private company. A chance to enter the public realm and into the public view. The transition is a crucial one for any company willing to jump the hoops needed for success.

Companies seeking an IPO have to be prepared for meticulous planning and keeping up with regulatory compliance. This way everything will go according to plan. By doing so they can continue growing while also gaining access to capital markets.

With this support, and by following these steps companies can get ready for the future of their business in the public sector.