Initial Public Offering (IPO)

What Is an IPO?
An initial public offering (IPO) refers to the process of offering shares of a private
corporation to the public in a new stock issuance. Public share issuance allows a
company to raise capital from public investors. The transition from a private to a
public company can be an important time for private investors to fully realize
gains from their investment as it typically includes share premiums for current
private investors. Meanwhile, it also allows public investors to participate in the
offering.

A company planning an IPO will typically select an underwriter or underwriters.

They will also choose an exchange in which the shares will be issued and
subsequently traded publicly.

The term initial public offering (IPO) has been a buzzword on Wall Street and
among investors for decades. The Dutch are credited with conducting the first
modern IPO by offering shares of the Dutch East India Company to the general
public. Since then, IPOs have been used as a way for companies to raise capital
from public investors through the issuance of public share ownership. Through
the years, IPOs have been known for uptrends and downtrends in issuance.
Individual sectors also experience uptrends and downtrends in issuance due to
innovation and various other economic factors. Tech IPOs multiplied at the height
of the dot-com boom as startups without revenues rushed to list themselves on
the stock market. The 2008 financial crisis resulted in a year with the least
number of IPOs. After the recession following the 2008 financial crisis, IPOs
ground to a halt, and for some years after, new listings were rare. More recently,
much of the IPO buzz has moved to a focus on so-called unicorns—startup
companies that have reached private valuations of more than $1 billion.

Investors and the media heavily speculate on these companies and their decision
to go public via an IPO or stay private.

Initial public offering

An initial public offering (IPO) or stock market launch is a type of public offering. A public offering
is any tradable asset that is offered to the public. In an initial public offering, shares of stock in a
company are sold to the general public, on a securities exchange, for the first time. Through this
process, a private company transforms into a public company. Initial public offerings are used by
companies to raise money for expansion and to become publicly traded enterprises. A company
selling shares is never required to repay the money to the people who buy them.
History
See also: Dutch East India Company

Courtyard of the Amsterdam Stock Exchange (Beurs van Hendrick de Keyser [nl]) by Emanuel de Witte, 1653.
Modern-day IPOs have their roots in the 17th-century Dutch Republic, the birthplace of the world's first
formally listed public company,[2] first formal stock exchange[3] and market.[4][5][6][7]

The Dutch East India Company (also known by the abbreviation “VOC” in Dutch), the first formally listed public
company in history,[8][9] In 1602 the VOC undertook the world's first recorded IPO, in its modern sense. "Going
public" enabled the company to raise the vast sum of 6.5 million guilders.

The earliest form of a company which issued public shares was the case of the publicani during
the Roman Republic. Like modern joint-stock companies, the publicani were legal bodies
independent of their members whose ownership was divided into shares, or partes. There is
evidence that these shares were sold to public investors and traded in a type of over-the-
counter market in the Forum, near the Temple of Castor and Pollux. The shares fluctuated in value,
encouraging the activity of speculators, or quaestors. Mere evidence remains of the prices for
which partes were sold, the nature of initial public offerings, or a description of stock market
behavior. Publicani lost favor with the fall of the Republic and the rise of the Empire.[10]
In the early modern period, the Dutch were financial innovators who helped lay the foundations of
modern financial systems.[11][12] The first modern IPO occurred in March 1602 when the Dutch East
India Company offered shares of the company to the public in order to raise capital. The Dutch East
India Company (VOC) became the first company in history to issue bonds and shares of stock to the
general public. In other words, the VOC was officially the first publicly traded company, because it
was the first company to be ever actually listed on an official stock exchange. While the Italian city-
states produced the first transferable government bonds, they did not develop the other ingredient
necessary to produce a fully fledged capital market: corporate shareholders. As Edward
Stringham (2015) notes, "companies with transferable shares date back to classical Rome, but these
were usually not enduring endeavors and no considerable secondary market existed (Neal, 1997, p.
61)."[13]
In the United States, the first IPO was the public offering of Bank of North America around 1783.[14]

Advantages and disadvantages

Advantages[edit]
When a company lists its securities on a public exchange, the money paid by the investing public for
the newly-issued shares goes directly to the company (primary offering) as well as to any early
private investors who opt to sell all or a portion of their holdings (secondary offerings) as part of the
larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to
provide itself with capital for future growth, repayment of debt, or working capital. A company selling
common shares is never required to repay the capital to its public investors. Those investors must
endure the unpredictable nature of the open market to price and trade their shares. After the IPO,
when shares are traded freely in the open market, money passes between public investors. For early
private investors who choose to sell shares as part of the IPO process, the IPO represents an
opportunity to monetize their investment. After the IPO, once shares are traded in the open market,
investors holding large blocks of shares can either sell those shares piecemeal in the open market or
sell a large block of shares directly to the public, at a fixed price, through a secondary market
offering. This type of offering is not dilutive since no new shares are being created.
Once a company is listed, it is able to issue additional common shares in a number of different ways,
one of which is the follow-on offering. This method provides capital for various corporate purposes
through the issuance of equity (see stock dilution) without incurring any debt. This ability to quickly
raise potentially large amounts of capital from the marketplace is a key reason many companies
seek to go public.
An IPO accords several benefits to the previously private company:

 Enlarging and diversifying equity base

 Enabling cheaper access to capital
 Increasing exposure, prestige, and public image
 Attracting and retaining better management and employees through liquid equity participation
 Facilitating acquisitions (potentially in return for shares of stock)
 Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
Disadvantages[edit]
There are several disadvantages to completing an initial public offering:
 Significant legal, accounting and marketing costs, many of which are ongoing
 Requirement to disclose financial and business information
 Meaningful time, effort and attention required of management
 Risk that required funding will not be raised
 Public dissemination of information which may be useful to competitors, suppliers and
customers.
 Loss of control and stronger agency problems due to new shareholders
 Increased risk of litigation, including private securities class actions and shareholder derivative
actions[15]

Underwriter

What Is an Underwriter?
An underwriter is any party that evaluates and assumes another party's risk for a
fee. The fee is often a commission, premium, spread, or interest. Underwriters
are critical to the financial world including the mortgage industry, insurance
industry, equity markets, and common types of debt security trading. A lead
underwriter is called a book runner.

The Different Types of Underwriters

The term "underwriter" first emerged in the early days of marine insurance.
Shipowners sought insurance for a ship and its cargo in case the ship and its
contents were lost. Businessmen would meet in coffeehouses and examine a
paper describing the ship, its contents, crew, and destination.

Each person who wished to assume some of the obligation or risk would sign
their name at the bottom and indicate how much exposure they were willing to
assume. An agreed-upon rate and terms were set out in the paper. These
signees became known as underwriters.

Underwriters play a variety of specific roles depending on the context.

Underwriters are considered the risk experts of the financial world. Investors rely
on them because they determine if a business risk is worth taking. Underwriters
also contribute to sales-type activities; for example, in the case of an initial public
offering (IPO), the underwriter might purchase the entire IPO issue and sell it to
investors.
Mortgage Underwriters
The most common type of underwriter is a mortgage loan underwriter. Mortgage
loans are approved based on a combination of an applicant's income, credit
history, debt ratios, and overall savings.

Mortgage loan underwriters ensure that a loan applicant meets all of these
requirements, and they subsequently approve or deny a loan. Underwriters also
review a property's appraisal to ensure that it is accurate and the home is
approximately worth the purchase price and loan amount.

Mortgage loan underwriters have final approval for all mortgage loans. Loans that
are not approved can go through an appeal process, but the decision requires
overwhelming evidence to be overturned.

Insurance Underwriters
Insurance underwriters, much like mortgage underwriters, review applications for
coverage and accept or reject an applicant based on risk analysis. Insurance
brokers and other entities submit insurance applications on behalf of clients, and
insurance underwriters review the application and decide whether or not to offer
insurance coverage.

Additionally, insurance underwriters advise on risk management issues,

determine available coverage for specific individuals, and review existing clients
for continued coverage analysis.

Equity Underwriters
In equity markets, underwriters administer the public issuance and distribution of
securities—in the form of common or preferred stock—from a corporation or
other issuing body. Perhaps the most prominent role of an equity
underwriter is in the IPO process. An IPO is the process of selling shares of a
previously private company on a public stock exchange for the first time.

IPO underwriters are financial specialists who work closely with the issuing body
to determine the initial offering price of the securities, buy the securities from the
issuer, and sell the securities to investors via the underwriter's distribution
network.

IPO underwriters are typically investment banks that have IPO specialists on
staff. These investment banks work with a company to ensure that all regulatory
requirements are satisfied. The IPO specialists contact a large network of
investment organizations, such as mutual funds and insurance companies, to
gauge investment interest. The amount of interest received by these large
institutional investors helps an underwriter set the IPO price of the company's
stock. The underwriter also guarantees that a specific number of shares will be
sold at that initial price and will purchase any surplus.

Debt Security Underwriters

Underwriters purchase debt securities, such as government bonds, corporate
bonds, municipal bonds, or preferred stock, from the issuing body (usually a
company or government agency) to resell them for a profit. This profit is known
as the "underwriting spread."

An underwriter may resell debt securities either directly to the marketplace or to

dealers, who will sell them to other buyers. When the issuance of a debt
security requires more than one underwriter, the resulting group of
underwriters is known as an underwriter syndicate.

Underwriters and the IPO Process

An IPO comprehensively consists of two parts. The first is the pre-marketing
phase of the offering, while the second is the initial public offering itself. When a
company is interested in an IPO, it will advertise to underwriters by soliciting
private bids or it can also make a public statement to generate interest. The
underwriters lead the IPO process and are chosen by the company. A company
may choose one or several underwriters to manage different parts of the IPO
process collaboratively. The underwriters are involved in every aspect of the IPO
due diligence, document preparation, filing, marketing, and issuance.

Steps to an IPO include the following:

1. Underwriters present proposals and valuations discussing their services,

the best type of security to issue, offering price, amount of shares, and
estimated time frame for the market offering.
2. The company chooses its underwriters and formally agrees to underwriting
terms through an underwriting agreement.
3. IPO teams are formed comprising underwriters, lawyers, certified public
accountants, and Securities and Exchange Commission experts.
4. Information regarding the company is compiled for required IPO
documentation.
a. The S-1 Registration Statement is the primary IPO filing document. It
has two parts: The prospectus and the privately held filing information. The
S-1 includes preliminary information about the expected date of the filing. It
will be revised often throughout the pre-IPO process. The included
prospectus is also revised continuously.
5. Marketing materials are created for pre-marketing of the new stock
issuance.
a. Underwriters and executives market the share issuance to estimate
 demand and establish a final offering price. Underwriters can make
revisions to their financial analysis throughout the marketing process. This
can include changing the IPO price or issuance date as they see fit.
b. Companies take the necessary steps to meet specific public share
offering requirements. Companies must adhere to both exchange listing
requirements and SEC requirements for public companies.
6. Form a board of directors.
7. Ensure processes for reporting auditable financial and accounting
information every quarter.
8. The company issues its shares on an IPO date.
a. Capital from the primary issuance to shareholders is received as cash
and recorded as stockholders' equity on the balance sheet. Subsequently,
the balance sheet share value becomes dependent on the company’s
stockholders' equity per share valuation comprehensively.
9. Some post-IPO provisions may be instituted.
a. Underwriters may have a specified time frame to buy an additional
amount of shares after the initial public offering date.
b. Certain investors may be subject to quiet periods.

Corporate Finance Advantages

The primary objective of an IPO is to raise capital for a business. It can also
come with other advantages.

 The company gets access to investment from the entire investing public to
raise capital.
 Facilitates easier acquisition deals (share conversions). Can also be easier
to establish the value of an acquisition target if it has publicly listed shares.
 Increased transparency that comes with required quarterly reporting can
usually help a company receive more favorable credit borrowing terms
than as a private company.
 A public company can raise additional funds in the future
through secondary offerings because it already has access to the public
markets through the IPO.
 Public companies can attract and retain better management and skilled
employees through liquid stock equity participation (e.g. ESOPs). Many
companies will compensate executives or other employees through stock
compensation at the IPO.
 IPOs can give a company a lower cost of capital for both equity and debt.
 Increase the company’s exposure, prestige, and public image, which can
help the company’s sales and profits.
Disadvantages and Alternatives
Companies may confront several disadvantages to going public and potentially
choose alternative strategies. Some of the major disadvantages include the
following:

 An IPO is expensive, and the costs of maintaining a public company are

ongoing and usually unrelated to the other costs of doing business.
 The company becomes required to disclose financial, accounting, tax, and
other business information. During these disclosures, it may have to
publicly reveal secrets and business methods that could help competitors.
 Significant legal, accounting, and marketing costs arise, many of which are
ongoing.
 Increased time, effort, and attention required of management for reporting.
 The risk that required funding will not be raised if the market does not
accept the IPO price.
 There is a loss of control and stronger agency problems due to new
shareholders who obtain voting rights and can effectively control company
decisions via the board of directors.
 There is an increased risk of legal or regulatory issues, such as private
securities class action lawsuits and shareholder actions.
 Fluctuations in a company's share price can be a distraction for
management which may be compensated and evaluated based on stock
performance rather than real financial results.
 Strategies used to inflate the value of a public company's shares, such as
using excessive debt to buy back stock, can increase the risk and
instability in the firm.
 Rigid leadership and governance by the board of directors can make it
more difficult to retain good managers willing to take risks.

Why Does a Company Decide to Go Public?

Going public and offering stock in an initial public offering represents a
milestone for most privately owned companies. A large number of reasons
exist for a company to decide to go public, such as obtaining financing outside
of the banking system or reducing debt.

Furthermore, taking a company public reduces the overall cost of capital and
gives the company a more solid standing when negotiating interest rates with
banks. This would reduce interest costs on existing debt the company might
have.
The main reason companies decide to go public, however, is to raise money -
a lot of money - and spread the risk of ownership among a large group of
shareholders. Spreading the risk of ownership is especially important when a
company grows, with the original shareholders wanting to cash in some of
their profits while still retaining a percentage of the company.

One of the biggest advantages for a company to have its shares publicly
traded is having their stock listed on a stock exchange.

Advantages for a Company Having Listed Stock

In addition to the prestige a company gets when their stock is listed on a stock
exchange, other advantages for the company include:

 Being able to raise additional funds through the issuance of more stock

 Companies can offer securities in the acquisition of other companies

 Stock and stock options programs can be offered to potential employees,

making the company attractive to top talent

 Companies have additional leverage when obtaining loans from financial

institutions

 Market exposure - having a company's stock listed on an exchange could

attract the attention of mutual and hedge funds, market makers and
institutional traders

 Indirect advertising - the filing and registration fee for most major
exchanges includes a form of complimentary advertising. The company's
stock will be associated with the exchange their stock is traded on

 Brand equity - having a listing on a stock exchange also affords the

company increased credibility with the public, having the company
indirectly endorsed through having their stock traded on the exchange.

Other Considerations for a Company Going Public

Offering shares to the public has other advantages for companies, besides the
prestige of having their stock publicly traded on a stock exchange. Before the
Internet boom, most publicly traded companies had to have proven track
records and have a history of profitability.
Unfortunately, many Internet startups began having IPOs without any
semblance of earnings and without any plans on being profitable. These
startups were funded with venture capital and would often end up spending all
the money raised through the IPO, making the original owners rich in the
process and leaving the small investors holding the bag when the shares
became worthless.

This technique - of offering shares without creating value for stockholders - is

commonly known as an "exit strategy", and was used repeatedly during the
Internet boom causing the dot.com bubble to burst and bringing down the
market for IPOs in the early 2000s.
Nevertheless, some companies choose to remain private, avoiding the
increased scrutiny and other disadvantages having publicly traded stock
entails. Some very large companies, such as Domino's Pizza and IKEA
remain privately held.

https://www.tonyrobbins.com/business/ipo-vs-private/

HOW TO TAKE A COMPANY

PUBLIC
You might look at the list of some of the country’s huge public companies and
think that going public is something you do when you reach a certain size and
strength – after all, it’s usually behemoths like Apple and Wells Fargo making
the news. But did you know that giants like Staples, Publix and Wawa are
privately held? Before you make the public leap, be sure you know all the pros
and cons of IPO.

Tony Robbins has founded or been a partner in more than 30 companies, with
combined sales of $5 billion per year. Tony knows a thing or two
about business success – he’s been on the front lines and knows the benefits
of IPO, as well as the disadvantages.
 WHAT IS A PUBLIC COMPANY?

A public company is also referred to as a publicly held company, a publicly listed

company or a publicly traded company. It refers to one whose ownership is organized
as shares of stock. These stocks are freely traded on a stock exchange or in over-the-
counter markets and essentially allow members of the public to be part-owners in the
company. The value of a public company is largely based on the price of their shares
of stock and decisions about the company are often made by major stock holders.

The first recorded public company was the Dutch East India Company, which began
issuing stocks and bonds to the general public in 1602. By becoming the world’s first
IPO, the Dutch East India Company was able to raise 6.5 million guilders more
quickly than any other company that came before it.

WHAT DOES “GOING PUBLIC” MEAN?

“Going public” means a private company is offering its stock for sale to the
public for the first time. Also called an “initial public offering (IPO),” how to take
a company public involves bringing in an investment bank to underwrite the
company and assume the risk of the sale, as well as a law firm to take care of
the public disclosures. It’s often the goal of business owners and
entrepreneurs, allowing them to rank with business moguls and raise their
company’s profile. It’s the goal of venture capitalists, too. The benefits of IPO
to investors are clear: When a company makes their shares public, they’ll
make a lot of money off their investment.

WHY DO COMPANIES GO PUBLIC?

The main reason companies go public is to raise capital. If a business is

successful, it will command a high price for its shares, which can be a windfall
of cash for the owners or partners. Getting out of debt and reducing the
overall cost of capital are also answers to the question “Why do companies go
public?” When a company begins offering shares to investors, they have more
solid standing with banks and other financial institutions and can negotiate
better interest rates.

Spreading the risk of owning a business among a large group of shareholders

can be another reason for those business owners who want to reduce the
chance of losing a lot of money. Going public is also a solid exit strategy for
business owners who have put in the work to build a profitable company and
are ready to cash out and buy that beach house or yacht they’ve always
dreamed of – or start another successful business.

PROS OF GOING PUBLIC

Why do companies go public? This question can usually be answered with

one word: money. The money raised when your company makes an IPO can
be useful in many ways: It can be used to pay down debt or for research
and strategic innovation to help get to that “next level” of product
development. Aside from monetary rewards, going public has many other
benefits. Once a company is public, it is easier to raise money without having
to borrow, because you’ll be able to offer secondary stock offerings to the
public. You’ll also be able to use stock to make acquisitions of other
companies, so you can diversify your business or absorb the competition.

There are many benefits of IPO in terms of marketing as well. You can use
stock options, as well as the simple prestige that comes with being a public
company, to attract and retain better talent. IPOs also create publicity for the
company, which can help you reach new markets that may not have heard of
you before, potentially increasing your market share even further.

CONS OF GOING PUBLIC

What is a public company? Essentially, it’s one that you no longer privately
own, which can lead to some notable disadvantages. It isn’t an easy process
– the Securities and Exchange Commission (SEC) requires compliance with
numerous financial reporting laws as outlined in the Securities Exchange Act
of 1934. The cost can be high, and fees seem to increase every year. You’ll
need to ensure you’re going to get a good price for your shares in order to
make up the cost. Another drawback of SEC disclosures is that they can give
away your weaknesses to the competition.

The other con of IPO is a loss of independence. When your shares are
publicly traded, your company will be more beholden to the market and less
able to go in new and innovative directions. Your initial funders may have
been venture capitalists, but now they’ve reaped the benefits of IPO to
investors, and you’ll have new stakeholders. It can be difficult to focus on your
company’s long-term growth when investors want to see results today – and
when they have a say in management decisions. The pressure for profits can
lead to some risky business decisions, so close oversight is necessary.

HOW TO TAKE A COMPANY PUBLIC

How to take a company public is not a simple process and it involves a

number of steps. The first is to hire an investment bank as underwriters to vet
and analyze your financial performance. After choosing an investment firm,
you then structure a deal that addresses how much capital you want to raise
and how much of a commission the bank will take from each stock sale. Once
this has been agreed on, you file a registration statement with the Securities
Exchange Commission. Upon approval, you can approach investors and
accept subscription requests before moving on to the final steps of negotiating
a price for your IPO, choosing a stock exchange and selling stocks to the
public.

SHOULD YOUR COMPANY GO PUBLIC?

Like any major decision, there are pros and cons of IPO. If you’re thinking about
going public, you’ll want to consult a professional. Work with an investment bank to
go through the underwriting process. The firm will evaluate your risk and determine
the value of your company – and can also help you consider the pros and cons of
going public. You may have heard that $100 million in revenue is the magic number
for taking your company public, but you don’t need to be that big. Alternatively, you
don’t necessarily have to go public if you are that big.
 Some of the typical things that qualify a company to make an IPO are:

 Consistent revenue, with the audited financials to prove it

 The ability to predict future earnings in the range of 25% growth
 A low debt-to-equity ratio – leveraged companies aren’t likely to get a
good price
 A strong player in its market, with the potential to keep growing or to
enter new markets, and a business plan that lays out how to do so
 A diverse customer base or product offering that is not reliant on a
single technology, supplier or distributor
 A solid leadership team that is prepared to go public and enforces good
business processes