An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.
Large amounts of capital have been raised in recent years by small companies that went public. Initial public offerings (IPOs) have made instant billionaires of entrepreneurs. These IPOs flooded the coffers of the companies with millions, if not billions, of dollars.
Going public isn't for every company, however. The ideal candidate for an IPO has both a well-established track record of steadily growing sales and earnings, and operates in an industry that's currently in the news. You may be able to go public if you have a whole lot of one of these characteristics and not much of the other--for instance, little earnings but lots of public interest characterized many internet-related IPOs during the dotcom boom.
An IPO is also referred to as a public offering. When a company initiates the IPO process, a very specific set of events occurs. The chosen underwriters facilitate all of these steps.
• An external IPO team is formed, consisting of an underwriter, lawyers, certified public accountants (CPAs) and Securities and Exchange Commission (SEC) experts.
• 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.
• The financial statements are submitted for official audit.
• The company files its prospectus with the SEC and sets a date for the offering.
An IPO is probably the most expensive way to raise money in terms of the amounts you have to lay out upfront. The bills for accountants, lawyers, printing and miscellaneous fees for even a modest IPO will easily reach six figures. For this reason, IPOs are best used to raise amounts at least equal to millions of dollars in equity capital.
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