Best explantion on Initial Public Offering

initial public offering

It refers to a private company when it first offers shares of its stocks ( ownership) for purchase to the general public, this is usually known as an Initial Public Offering (IPO).

There are many reasons why a private company will decide to make an IPO and here below are some of them:

1.Raise Expansion Capital

2. Monetize the investments of early private investors

3.Become a publicly traded company on a securities exchange.

4.Gain credibility and prestige.

Here is how a company goes public

When a company is ready to offer shares of its stock to the public, there are a few major steps involved:

Step 1

The company will hire an investment bank (underwriters)

Step 2

The investment bank will  put together a registration statement which is going to be filed with the Securities and exchange commission(SEC).

This document contains information about the offering which consists of Financial statements, Management background, any legal problems, where the money is to be used and Insider Holdings

Step 3

The SEC then requires a cooling off period, in which they investigate and make sure all material information has been disclosed.

Step 4

During the cooling off period the details of the proposed offering except for the offer price and the effective date are offered to potential institutional investors in the form of a document called the initial procpectus ( Red Herring)

Step 5

Once the SEC approves the offering, stock price and a date is set when the stock will be offered to the public.

Step 6

Finally, the shares are sold on the stock market and the money is collected from investors.

Advantages of an IPO

1.Proceeds from the IPO go directly to the company and its early private investors.

2.Early investors have the opportunity to cash out , selling some or all of their shares.

3.A large pool of public investors provides a diverse equity ( ownership) base.

4.Sales of shares provides capital for growth and repayment of debt.

5.An IPO provides cheaper access to capital than taking on debt.

6.After the IPO , a company has new options for acquisitions, potentially using the sale of its shares.

7.Going public also offers companies new financing options including equity, convertible debt and cheaper bank  loans.

8.A company going public carries a great deal of exposure , prestige and enhanced public image. This attracts better employees and management.

9.Even if the company fails , it is not responsible to pay back their investment, they must sell their shares at market price.

Disadvantages

1.Significant costs related to Marketing , Underwriting , Accounting.

2.Company has to divulge information that could be helpful to their competitors. This can ruin a company’s competitive edge.

3.High demands of time and attention by senior management.

4.There is always a risk that required funding will not be raised.

5.Loss of control due to new shareholders’ voting rights.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s