An IPO is an Initial Public Offering which is where a company will list on the stock exchange. Companies, governments and organisations list on the stock exchange as a means of raising capital (money) in order to invest or grow. The stock exchange makes it assessable for individuals and institutions to invest in listed companies in exchange for securities (shares, bonds etc) that could potentially grow in value.
An IPO is known as the primary market for investors and is typically open to wholesale and sophisticated investors (investors that hold a certain number of net assets or income). Once a company has raised the required funds in exchange for shares they will then begin trading this money publicly on the stock exchange which is known as the secondary market meaning it is open to retail investors (individual investors that typically trade smaller amounts for themselves and or don’t meet the wholesale or sophisticated investor test set out by the applicable regulator for example in Australia this would be ASIC, in the United States this would be the SEC).
How does a company do an IPO?
There is a series of steps involved in taking a company public. Before these steps, companies are required to meet the set listing criteria of the stock exchange they choose to list on. Each stock exchange requires the company to have a certain amount of revenue, capital, experience and performance (past and future) in order to list on their exchange. The figures surrounding this criteria change depending on the size and location of the stock exchange and can be found on each stock exchanges website.
Once the company meets the criteria to list, the take the following steps:
1. Set up an external IPO team
The underwriter usually sources the team, so the first step for the company is to find an underwriter which is an investment bank or banks. They then find other investment banks to co invest along with finding lawyers, certified public accountants and Securities and Exchange Commission (SEC) experts to facilitate the IPO.
2. Information regarding the company is compiled, including financial performance and expected future operations. This becomes part of the company prospectus, which is circulated for review.
3. The financial statements are submitted for an official audit.
4. The company files its prospectus with the SEC and sets a date for the offering.
Underwriters are instrumental in IPOs as they agree to fund the IPO meaning, they buy shares in the company before it lists in the hopes that they will be able to sell their shares for a higher price when the company goes public.
Underwriters will also typically drum up interest in the shares by doing a ‘roadshow’ which is where they take the prospectus and presents it to prospective investors (usually wholesale, professional, sophisticated investors or pension funds). These can be trips around the world or can be video or internet presentations.
If a prospective investor likes the IPO, underwriters can legally offer them shares at the price they eventually set before the stock is listed on an exchange. This is called IPO allocation.
A company’s listing price is determined by the interest of investors along with the price they are willing to pay for an IPO allocation.
IPO vs a Direct Listing
IPOs are typically how companies become public, however they can list directly on the stock exchange without seeking an underwriter to raise capital.
The only difference with a direct listing is that the company doesn’t offer an IPO allocation nor does it allow underwriters to buy shares in the company pre-IPO. A direct listing is where existing shareholders in the company can sell their shares to other investors publicly via the on the stock exchange.
What is a lock up period?
A lock-up period, also known as a lock in, lock out, or locked up period, is a predetermined amount of time following an initial public offering where large shareholders are restricted from selling their shares.
What is a confidential filing?
When a company wants to list on a stock exchange they have to file their prospectus with the local regulators like the Security and Exchange Commission (SEC) as an example, this is called a filing. For companies that wish to keep the contents of their prospectus confidential they file under a confidential filing. Many startups will do a confidential filing so that they can gauge the interest of investors and begin the process of listing without as much public scrutiny. A confidential listing also means that the date of your IPO can be determine later and not at the time of filing.
What is a ticker symbol?
When a company lists on a stock exchange they list under a ticker symbol. A ticker symbol are the letters that represent a particular listed stock, for example Apple Inc.’s ticker symbol is AAPL.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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