Initial Public Offering Basics, Benefits & Requirements
Posted in Finance on September 5th, 2010 by Adriana Noton – Be the first to commentWhen a privately held company goes public via an Initial Public Offering, it is one of the most significant milestones in the company’s entire history. Way it works is that the company issues share certificates to investors and gets listed on a chosen stock market. After the listing, the company’s shares can be traded on the market.
It is an extremely complicated process with a maze of regulatory and compliance requirements. But the benefits, in terms of finance, are just as high. A successful and well-subscribed IPO can instantly turn a small regional company into an international corporate heavyweight.
The sudden influx of capital with no strings attached helps keep the company’s current business on track, and puts its growth plans on a high-speed track. Liquidity problems which can derail a company’s existence disappear, and lenders can be paid off in full. The business also gets a boost from all the hype over the IPO and customers and business partners will start looking at the company with greater trust.
The way an IPO works is that the SEC needs the company to file a registration statement along with a prospectus detailing every aspect of the company and its business. The prospectus will also include the company’s post-IPO plans and how the company plans to utilize the funds.
The underwriters will not only assist with the filing requirements, but also the change in the company’s structure. This means they assist in the transition from a private run enterprise to a public company with a board and stockholders. But their main job is to help decide the specifics of the IPO – the pricing, the number of shares and the market.
Once the IPO goes through, the company has certain new responsibilities. This includes making public the quarterly financial results, filing statements with the SEC for anything major that impacts the company and its operations, and the AGM. At the stockholders’ meeting, important issues are discussed and voted upon, including the composition of the Board and the top-level management. This is one reason why many companies hire new mangers after an IPO, to deal with issues specific to public companies.
The success of an IPO is mainly based on how sound the finances, growth prospects and revenue model, not to mention the viability of the sector the company belongs to. But many IPOs have crashed and burned even with all this. Reasons why an IPO might fail include bad timing, over-pricing and/or too big a size, and choosing the wrong market.
A company could pull off a large IPO in the US, but the same might not be possible in Canada, where the IPOs are usually a little bit smaller and under priced. In Europe, a company has to take into account the situation not only for its own market, but also the conditions in every market in the EU, since the economies and markets of member nations are co-dependent.
Back before the dotcom dustup, any college kid with a website could file for an Initial Public Offering and rake in the big bucks. After the latest recession, things are now every different. Investors need a company with significant assets and long-term growth prospects. The regulatory requirements too are a lot tougher, but at the end of this long hard road there is a huge pot overflowing with shareholder funds.
In order to grow and expand, many companies will go through the IPO How process and make an Initial Public Offering (IPO) to the general public. A new IPO Prospectus valuation is usually made, and Canadian IPOs are becoming more common nowadays.