An initial public offering, or IPO, is the process by which privately owned companies make their shares publicly available to investors. The IPO allows the company to raise money through stock sales and to diversify its source of capital. A successful IPO can enable the company to grow and expand its business operations. Typically, the value of the company’s stock rises after an IPO because investors have the opportunity to purchase the stock at a discounted price.
The IPO process is highly regulated, with detailed regulations established by law to protect investors. The process involves a team of specialists, including the listing company, investment banks and lawyers. A lead investment bank, typically one of the big Wall Street firms such as Goldman Sachs or Morgan Stanley, will take charge of the IPO and manage the whole process. The bank will carry out due diligence and put together a prospectus, which is reviewed and approved by regulators before the listing can go ahead.
During the IPO process, the underwriters will analyze the financial details of the company, arriving at a valuation and IPO price. The underwriters will also prepare a registration statement, known as an S-1 filing, for submission to the Securities and Exchange Commission. This provides information on the company’s background, goals and management team, along with financial data such as revenue and profits.
As the IPO nears, the underwriters will market the shares to institutional investors. They will negotiate pricing and terms with each investor. Depending on demand and other factors, the underwriters will decide how many shares to offer and set a price range for the IPO. If they issue too many shares, the company’s share price will drop, which can have negative effects on the underwriters and on their investors.
Once the IPO has taken place, the underwriters will be paid by the company for their services. In addition, the managing underwriter (often called the bookrunner), who sold the most shares of the IPO, will receive a fee and a concession. Other underwriters in the syndicate will share the fee and concession proportionally based on how many shares they sold.
After the IPO, the listed company is free to sell its shares on the secondary market. In some cases, the underwriters will buy back shares from the market once they’ve been in circulation for a while to avoid being left with them at a loss.
The IPO process is complex and time-consuming, but it offers many benefits to companies. In the long run, it can allow them to raise larger amounts of capital, access the global market and become a leader in their industry sector. It can also provide a way for early investors and company insiders to cash in on their investments. IPOs can be volatile in their early days, but the underlying business fundamentals should ultimately determine whether they rise or fall. Sign up for our Fidelity Viewpoints weekly email to get the latest insights on investing in IPOs. initial public offering services