Initial public offering (IPO)
An Initial Public Offering (IPO) marks a private company's first attempt to sell its shares to the public, serving as a means to raise capital and gain visibility in the market. The IPO process is heavily regulated in the United States, involving several steps to ensure compliance with legal and financial guidelines. Companies must prepare a detailed prospectus summarizing their business, financial health, and risk factors, and file this along with a registration statement with the Securities and Exchange Commission (SEC). After SEC approval, the company collaborates with underwriters—typically investment banks—to set the share price and manage the sale.
The IPO period often includes a "road show," where company representatives present to potential investors to generate interest. Only certain investors, including institutional investors and select individual investors, are usually eligible to participate in the IPO. While investing during an IPO can carry financial risks due to price volatility influenced by media coverage and market speculation, many investors view the potential rewards as worth the risks. A notable example is Facebook's IPO in 2012, which raised $16 billion, making it one of the largest in U.S. history.
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Initial public offering (IPO)
An initial public offering (IPO) is a private company’s first sale of shares of stock to the public. The process allows a company to raise capital while also capturing the attention of the media and potential customers. IPOs in the United States are heavily regulated, and only investors who meet certain criteria are eligible to participate. Purchasing stock during an IPO can be financially risky, as stock prices for newly public companies tend to be influenced by media attention and can fluctuate significantly. However, many investors consider the benefits to outweigh the risks.
Overview
When a private company seeks to raise additional capital, its owners have several options, ranging from obtaining venture capital from private investors to transitioning the business into a publicly traded company with numerous shareholders. In the latter instance, the company typically undertakes an IPO, which is an initial public offering of shares of stock.
Businesses based in the United States must complete a number of steps prior to holding an IPO. A company must first ensure that it is properly structured and that all business activities have been carried out and documented in accordance with all applicable regulations, as public companies face an increased amount of scrutiny from both regulatory bodies and shareholders. Next, the company must collaborate with securities underwriters, or investment banks that oversee the marketing and sale of the shares, to determine the price at which the shares will be offered. In some cases, a uniform share price is set through a “Dutch auction,” in which potential investors place bids and only those who bid high enough receive shares; however, this practice is relatively uncommon. The company must then assemble a prospectus that includes a summary of the company’s history, risk factors, and other financial and organizational information that potential investors should know.
Next, the company must file a registration statement, consisting of the prospectus and additional documentation, with the Securities and Exchange Commission (SEC). The SEC will review the statement to ensure that it makes all the necessary disclosures and may request that the company make changes or supply further information. The company must also receive approval from the Financial Industry Regulatory Authority (FINRA), a private corporation that oversees the underwriting process, and from the market on which the company will be listed, such as the New York Stock Exchange (NYSE) or the NASDAQ.
Following the filing of the registration statement, representatives of the company will embark on what is known as the “road show,” a series of meetings with prospective investors. After the SEC declares the registration statement effective, the company will make the final arrangements with the underwriters, who will then begin the IPO and complete sales of stock. The IPO will typically close within three or four business days, depending on the time of day at which it opened.
In addition to managing the IPO itself, the underwriters determine which investors are eligible to purchase shares of stock during the first public offering. Underwriters typically work with institutional investors, such as hedge funds, as well as a select pool of experienced individual investors. Buying shares of stock with the intention of immediately reselling them—a process known as “flipping”—is discouraged, and investors with a history of doing so may be banned from participating in IPOs.
Bibliography
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