A planned process
AN INITIAL public offering or IPO is the process through which a private company offers for sale its shares of stock to the public for the first time. Driving the company to do so are various reasons, which include its desire to raise capital for funding of business expansion and investments, to provide liquidity for shareholders, and to further improve its reputation, among many others.
Prior to foraying into the stock market via an IPO, a company must take careful planning to be successful, and for professional services firm PricewaterhouseCoopers (PwC), this primarily involves two strategies.
“First, a company must prepare its management team and business units to begin acting like and functioning as a public company, both internally and externally. Second, a company must identify the key players in its going-public team, from the experts it will hire to the staff members who will help prepare the registration and other sales documents,” PwC noted in its “Roadmap for an IPO: A guide to going public” paper.
A company going public must first hire an underwriter, or an investment bank, to facilitate all of the steps of its IPO. An underwriter will assist the company in determining how much money it expects to raise in the IPO, the type of securities to be issued, and all the other details in the underwriting agreement. An underwriter is also the one responsible for seeking and approaching potential investors. A company can have a single investment bank as its underwriter or choose to have more, with one taking the lead.
Investopedia, which provides financial content online, says that a company and its underwriter can then decide on the deal structure. In a firm commitment, it explains, the underwriter guarantees a specific amount of money will be raised and thus buys the entire offer and resells it to the public. The best efforts agreement, on the other hand, means that the underwriter sells the shares of stock on behalf of the company without guaranteeing how much will be collected.
“Investment banks are often hesitant to shoulder all the risk of an offering, so the lead investment bank can form a syndicate of underwriters by soliciting other banks who each sell a part of the issue,” Investopedia notes.
The next step is filing a registration statement with the Securities and Exchange Commission (SEC). This document contains detailed information about the offering and company information such as financial statements, management background, legal problems ( if any), where the proceeds will go, etc., but not the offer price and date yet. According to Investopedia, the SEC then sets a “cooling off period” to make sure all the information submitted to it is correct and the relevant financial data has been disclosed. Once the SEC approves the offering, it finally sets a date for the IPO.
Following the SEC’s green light is the handing out of the preliminary prospectus, which has the estimated price range for one share of the company’s stock and other important information about the offering.
The company may now start its “road show” to meet prospective investors and inform them about the upsides of investing in it, after which declaration of effectivity of the registration statement is requested from the SEC. This enables purchases to be made. The company and the underwriter/s list the share price of the stock to be offered in the prospectus’ final version.