An initial public offering (IPO) is an important milestone for a company, as it provides access to capital that can be used for growth and expansion. It also lends credibility to the company as a publicly listed entity that can be a consideration for future venture capital funding and helps with securing favorable credit terms with banks. However, the benefits of an IPO can come with several risks that need to be considered by both entrepreneurs and investors.
In order to conduct an IPO, a company needs to partner with an investment bank that can act as the underwriter. The underwriter will help the company fulfill its financial and legal obligations and arrive at a price for the shares to be issued in the primary market. The underwriter may do this through either a fixed price method or by conducting a “book building” process, in which the underwriter analyzes confidential investor demand data and determines an issue price through an auction.
The underwriter will then begin marketing the IPO to investors. This usually includes a road show, where the underwriter and the issuing company go to visit prospective investors in order to build interest for the upcoming offering. The issuing company will also need to complete multiple regulatory filings with the relevant securities regulator to proceed with the IPO. This is a time-consuming process that often requires expert help to ensure regulatory compliance.
Once the IPO is priced, the company will be able to start trading on the secondary markets. This allows the company to raise additional capital and give its employees equity in the company. It can also open up more financing opportunities such as convertible debt and cheaper bank loans. It can also issue new shares to raise funds for acquisitions or other purposes, which is known as a follow-on offering.
Aside from the capital raising aspects of an IPO, there are other advantages such as increased visibility and brand recognition. Moreover, it can also attract top-notch talent by compensating them with share-based incentives such as employee stock ownership programs (ESOPs). However, a disadvantage of an IPO is that it can be difficult to buy IPO shares, especially for retail investors who do not have brokerage accounts or have to wait to open one.
In addition, if the underwriters overprice the IPO, the underlying stock can quickly fall in value on its first day of trading. This can be problematic for the underwriters, who will have to sell their IPO shares at lower prices or face losing their commitment to invest in the stock.
As a result, many seasoned investors may avoid an IPO because of the risk that they will be forced to sell their shares at a loss. This can be a huge problem for companies that are looking to raise large amounts of money through an IPO. initial public offering services