Here is what you need to know before you decide to file for an Initial Public Offering (IPO)
Here is what you need to know before you decide to file for an Initial Public Offering (IPO)

An Initial Public Offering is a crucial decision taken by any private enterprise for growing its business. Before an IPO, any company is considered private and as a private company, the business is limited to a relatively small number of shareholders like the early investors that include founders, family friends and the other professional investors like angel investors or venture capitals. But when a company reaches that stage in its growth process where it is mature enough to go with the regulations of Security and Exchange Commission and believes that it has the potential to get along with the benefits and responsibilities to include public shareholders, the business begins advertising its interest in going public. 

Filing an IPO is definitely a big step as it gets the company an access to raise a lot of money and greater ability to grow and expand widely. With increased transparency and sharing listing credibility it can be a great factor to help it gain better terms for going for borrowed funds. 

But before we get into why any business decides to file an IPO, what is the process involved, how to figure out if you need to go for an IPO filing and if yes what is the process, let’s get to know what is an Initial Public Offering?

An IPO or the Initial Public Offering

When any private company or startup first sells the shares of stock to the public this is known as an IPO or Initial Public Offering. In simple words an IPO is when the ownership status of a company transitions from private ownership to the status of public ownership. For the reasons you might have heard, sometimes the IPO process is also being referred to as “going public”.

Mostly this growth stage of any company occurs when it has reached a private valuation of around US$ 1 billion which is also known as the unicorn status. But the private businesses at other valuations that have strong fundamentals and proven potential for profitability can also qualify for Initial Public Offering. It solely depends on the market competition and their ability for meeting the listing requirements. 

The biggest IPOs

The following are the biggest ipo ever across the world:

IPO NameYearAmount
Ant Group2020US $34.5 billion
Saudi Aramco2019US $29.4 billion
The Alibaba Group2014US $25 billion
SoftBank Group2018US $23.5 billion
Agricultural Bank of China2010US $22.1billion
Industrial and Commercial Bank of China2006US $21.9 billion
American International Assurance2010US $20.5 billion
Visa Inc.2008US $19.7 billion
General Motors2010US $18.15 billion
NTT DoCoMo1998US $18.05 billion
Enel1999US $16.59 billion
Facebook2012US $16.01 billion
Data Source: Wikipedia

What is the reason why companies file for an IPO?

A privately held company can grow only that big before the investment for continuous growth becomes meager. Like for any startup the sources of capital during its early growth phase are usually venture capital or loan from financial institutions. But both of them have the limitation of limited money or a return expected from the money. 

The companies generally issue an IPO for raising capital to clear off debts, new fund growth initiatives, raising the public profile, or simply allowing company insiders to diversify their present holdings. 

When a company decides to go public it can avoid the debt application from financial institutions and the other control factors that venture capitals impose. And this is the primary reason why companies decide to go for IPO. Eventually all of the companies which are listed on public exchanges have to go through this transition at some point of time. And the reason that stock sales offers the ability to make great capital is one of the key points that has made many companies as large as they are presently.

Should you file an IPO for your business?

An IPO accords a number of advantages and disadvantages for a company, let’s get to know them and then decide if it suits for your business to file for an IPO or not.

The major advantages

  • It offers scaling, diversifying and enlarging the equity base of the company
  • It enables the businesses to get cheaper capital
  • It increases the public image exposure and prestige of any company
  • With liquid equity participation the company can attract and retain better management and employees
  • It also creates felicitating acquisitions in return for stocks and also creates multiple financing options like cheaper bank loans, equity etc. 

The disadvantages to know

  • With an IPO falling comes various legal accounting and marketing cost and many of these are ongoing forever
  • It requires you to disclose your business and financial information publicly
  • It needs meaningful time efforts and attention for the management and still has the risk that required funding will not be secured
  • The public dissemination of information can be used by your competitors customers or suppliers

The process of filing for an IPO

So, once you believe that your company is at that point where it can manage and bear the responsibility of going public, and it is beneficial considering the financial aspects, your business is ready to go for an IPO. The process for filing and IPO timeline is a quite long process and can take around six months to a year to get completed. 

The IPO procedures differ by various laws in different countries. Usually, a company goes through the following steps while via the filing IPO process:

Planning: It is indeed the first and a very important step for an IPO procedure that includes:

  • Developing the management and professional team
  • Growing the business with respect to public marketplace you are targeting
  • Obtaining the audited financial statements by using the accepted accounting principles by IPO
  • Cleaning up the company’s act
  • Establishing the antitakeover defenses
  • Developing a good corporate governance
  • Creating bail out opportunities and taking opportunities of the available ipo windows

Selecting the investment bank: The second step for an IPO process is opting the investment bank that can advise you on Initial Public Offering and provide the underwriting services. The company can select an investment bank according to reputation, research quality, industry expertise or distribution. 

Due diligence and the filings: This is the process of “underwriting” in which any investment bank which is considered as “underwriter acts as a broker between investing public and issuing company to help out the issuing company to sell the initial share sets. There are various underwriting arrangements available for the issuing companies which are:

  • Firm commitment
  • Best efforts agreement
  • All or none agreement
  • Syndicate of underwriters

Also and underwriter is required to draft a few of the documents that are:

  1. Engagement letter
  2. Letter of intent
  3. Underwriting agreement
  4. Registration statement
  5. Red herring document

The pricing of IPO: Once, the Initial Public Offering is approved by the Securities and Exchange Commission the effective date is decided. Prior to the effective day the underwriter and the issuing company decides the offer price at which the issuing company will sell the shares and the number of shares that need to be sold. It is crucial to decide the offer price as it will be the price at which the issuing company will raise capital. 

Stabilizing: So when the issue is brought to the market the underwriter has the responsibility to provide analysts recommendations for the aftermarket stabilization and then create a market for the issued stock. The underwriter also carries out “after-market stabilisation” when any ‘order imbalances’ event occurs by purchasing the shares at the offer price or below it. 

Transition:  The last and final stage of the Initial Public Offering process is the transition to the market competition that starts 25 days after the IPL and once the Quiet Period that SEC mandates ends. 

At the end we can say filing for an IPO is a quite complex process and involves several risks and a long filing ipo time as well. But if you get it the right way, any business can see the return for the investment in the business and a wider opportunity to raise capital and expand the firm.

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