An Initial Public Offering (IPO) is the process whereby a private company becomes a public company listed in the stock market by offering its shares to the public for the first time. Investors can then buy and sell those stocks on the market.
An IPO is how a company transitions from being privately owned by a select group of investors to becoming a publicly listed company so the general public can invest.
Why do companies go public?
#1 Growth: Also known as a primary offering, an opportunity for companies to raise funds from the public to grow the business and expand.
#2 Cash out: Also known as a secondary offering, another benefit is liquidity for early shareholders, including the founders, early employees, and early investors, to sell a portion of their shares to the public.
#3 Corporate Governance: Becoming more mature by following a whole new set of responsibilities and obligations imposed by the regulator to protect investors. By doing this, companies become more sustainable and encourage leadership to pursue stronger management and communication practices that should benefit their shareholders
#4 Public Awareness: Another benefit is an increased public awareness of the company. Listed companies are usually followed more by news agencies and accordingly enjoy more publicity which in many cases leads to an increase in market share for the company.
Pricing and Listing the stock
A company intending on going public via an IPO usually starts by hiring one or more investment banks to help it structure the whole process and decide on the initial price of its shares.
Along with the investment bank, the company issues a prospectus and a public subscription notice (PSN) detailing its business model and plans for the funds raised.
This is followed by a roadshow to pitch the company’s IPO to institutional investors, who give an indication of interest in buying the stocks. This helps the company and its investment bank in determining the share price. The IPO price is to be approved by the regulator and has to be equal to or less than the valuation report published by a registered independent financial advisor.
The company and its bank then announce the IPO to the public and decide on a subscription period whereby individual investors are allowed to submit their subscription orders. Allocation of shares to individual investors is determined by the overall subscription coverage and distributed on a prorated basis.
Once the company goes public, the shares are traded freely and other investors who missed the IPO can buy the stocks based on the market price.