Becoming a publicly-traded company can give any firm access to much more money and is often seen as a sign of a company’s maturity. However, it also comes with increased regulatory scrutiny and the need to adhere to investor demands. Having the right tools in place can help a company navigate these challenges successfully.
The first step is to select an investment bank that can facilitate the IPO. The investment bank will evaluate the firm through financial analysis and come up with a valuation, share price and an IPO date. Then, it will create a prospectus to sell the shares and file it with the appropriate regulator.
When the filing is complete, an underwriter will begin to market the IPO to potential investors. This process is referred to as “book building.” The underwriter can use two primary methods for pricing the shares: a predetermined fixed price or a price based on confidential demand data compiled by the lead manager (the so-called bookrunner). The latter method can increase a company’s perceived value and create a positive expectation among investors that the IPO will be successful.
Once a company is public, it can issue additional common shares through follow-on offerings. These can be used to raise capital for various purposes, including to pay off debt or reward employees with equity. However, each new issuance will dilute the existing shareholder base and can have negative effects on the share price.
An IPO is a complex process that involves a number of different players. The entrepreneur must clearly define the purpose of raising funds. Often, companies raise money to fund growth or acquire other businesses. They also may need to restructure operations or repurchase a portion of their shares.
A key player in the IPO process is the investment bank that acts as underwriter, which manages the sale and distribution of the IPO. Typically, the underwriter assembles a team of investment banks and broker dealers (called a syndicate) to sell the shares. This team conducts a thorough due diligence process and makes a variety of filings to ensure regulatory compliance.
Depending on the type of IPO, investors can request shares through their brokerage firm or directly from the underwriter during an IPO window. If they meet the eligibility requirements, their request will be allocated to them – but even then, it’s not guaranteed that they’ll get any shares. Brokerages typically only allocate a set amount of shares for individual investors, as the vast majority of the IPO’s shares are reserved for institutional buyers.
Getting those shares can be tricky, especially for individuals who do not have significant investable assets. For this reason, many IPOs are sold to family, friends and employees of the firm going public. The underlying rationale for this is to build up a loyal customer base, which is then likely to trade the shares over time. Alternatively, high-net worth clients of the investment banks involved in the IPO can be offered some of the shares. initial public offering services