When a company issues its shares for the first time on the stock market, that process is known as Initial Public Offering (IPO) or “going public”. In an IPO, a Private company sells the share of its owners to the general public by offering Shares at a Pre-set price. Generally, Companies goes for IPO to raise money and to expand the business and scale of the company.
Owners of a company may not have enough capital/money to run the business for a longer term or to expand the company’s scale. In those cases, IPO’s help companies to raise capital from the general public so that the company could pay its bills and increase its scale. Before going public through an IPO, the owners and the management should carefully decide how much of the ownership share they want with investors and how much they want to retain. And once the company is listed on the stock exchange through IPO, the companies always have an option to raise additional money by issuing additional shares in the Market.
Populate social networking website company Facebook (NASDAQ: FB) went for an IPO in 2012 and raised around $16.01 billion.
Steps in the IPO Process-
Appointing Advisers – The first step in the process of the IPO process is to appoint an experienced team of advisers. Professional advisers typically include corporate advises, Investment banks, etc.
Preparatory Work – After appointing adviser, the next step in the IPO Process is to issue a Prospect company will have to draft prospectus and drafting other required documents. The company will also have to undertake a due diligence process, and it will also have to take necessary approvals from the regulatory authorities of the country in which the Company intends to issue shares.
A Prospectus is an invitation to the public to buy the shares of the company, and it generally contains key information about the company. It discloses the company’s business model, risks, management team, financials, and other details to the general public so that the public could make an informed decision about the IPO.
Application to the Stock Exchange – A company needs to lodge a formal listing application to the stock exchange in which it wishes to get listed.
Closing the offer – Offer closing date is always mentioned in the Prospectus of the company. After closing the offer on that date, the company allocates shares to the shareholders who have applied for the shares and then start trading on the stock exchange.
The whole Process of listing could take several weeks. Australian Stock Exchange (ASX) generally takes around 19 weeks in the whole process of IPO, starting from appointing advisers to closing the offer. The IPO process could vary between different countries as each country is having their own laws and rules regarding the regulation of publicly traded securities.
Besides raising a large amount of money, IPO also facilitates in merger and acquisition, and it also increases the company’s exposure and prestige. However, after raising capital through IPO, the owners of the company could lose their control over the company, and it could also create agency problems due to new shareholders. The owners and the management of a company should always go through the pros and cons of IPO’s before taking the decision of going public.
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