What is an IPO?

An IPO is the initial public offering of the company’s shares on a stock exchange to raise additional capital. In other words, this is a process in which a private company (the issuer) becomes public and lists its shares on the stock market for the first time. Any interested investor may purchase these shares.

Moreover, it is essential to emphasise that an IPO is a complex process that requires compliance with various legal and financial regulations and obligations to investors and regulators.

Purposes of an IPO

  • The company may allocate proceeds from the sale of shares, for example, to develop and scale its business, fund research, optimise primary business processes, repay debts, and attain other corporate objectives
  • Going public may help the company to become more discernible in the market, creating favourable conditions for attracting new clients, partners, and investors
  • An IPO allows existing shareholders to sell the issuer’s shares they hold on the stock exchange
  • Public companies may use their stock as an incentive to attract and motivate key employees through stock options
  • The company may offer its shares as collateral when raising credit funds. It is worth highlighting that public reporting benefits public companies by enabling them to secure more advantageous credit terms in comparison to private companies

Stages of an IPO

Preliminary stage

At this stage, the company decides if going public is rational. If this is feasible, an audit of the business, corporate management, and asset structure is carried out. The offering price and volume are calculated, determining the potential market capitalisation.

The degree of information and financial transparency of the business is assessed to build trust among potential investors and enhance the company’s image. The company’s financial departments prepare for mandatory quarterly public reports.

Preparatory stage

This phase involves directly taking the company’s shares to the stock exchange. The underwriter does this, typically a large investment bank advising the company’s management on share price, offering volume, broker selection, and choice of a trading platform.

The underwriter issues an investment memorandum and submits it to regulatory authorities. In line with statutory regulations, this document discloses a complete ownership structure, reports, and lists the reasons for going public. If the regulator believes that the application meets all the requirements, it sets the date of the offering.

An advertising campaign, a Road Show, is launched after that and lasts no more than three weeks. Its objective is to pique as much interest among potential investors in the company’s share. The company’s management holds meetings with significant brokers and investors, and preliminary offering bids are collected. The underwriter evaluates the demand and potential capitalisation.

Final stage

At this stage, called Listing, the shares begin trading on the stock exchange. Only at this point can the effectiveness of the IPO be assessed. Suppose the company underwent a thorough evaluation at all stages, enabling the presentation of a market-priced offering. In that case, the issuer may develop a stable reputation, leading to a long-term trend of capitalisation growth.

Opportunities of conducting an IPO

The advantages of an initial public offering include the opportunity for the issuer to achieve the previously outlined goals, such as raising capital, developing the business, boosting popularity, enhancing stock liquidity, and attracting new clients, partners, and investors.

Challenges of conducting an IPO

  • Public companies are obliged to provide regular financial reports and information on their operations, which can be expensive and time-consuming
  • An IPO involves numerous regulatory obligations and rules that may limit the firm’s operations
  • Public companies face more rigorous assessments from investors and mass media
  • Running a company becomes more complex as it is necessary to comply with corporate governance standards and take into account shareholders’ interests
  • Founders may lose control over the company if they sell a larger portion of shares at the IPO

Alternatives to an IPO

  • Direct Listing – the company lists existing shares on a stock exchange without issuing new shares
  • Private Placement – the firm places shares or securities for a limited number of investors, often without public trading
  • Corporate Bonds – the company issues bonds to raise borrowed funds
  • Venture Capital – startup companies attract investments from venture funds and investors, giving them holdings in the company in return
  • Loans and Debt Financing – firms may apply to banks or other financial institutions to raise capital
  • Mergers and Acquisitions – companies may consolidate with other firms to expand business
  • Crowdfunding – this involves the use of crowdfunding platforms to obtain funds from a large number of small investors
  • Private Investors – companies may seek capital from private investors

Each of these alternatives to an IPO has pros and cons, and the choice depends on the company’s financial targets and strategy.