IPOs help companies raise capital and gain access to the public market for their shares. However, a number of factors can make an IPO successful or not. Among the most important are pricing, demand and regulatory compliance. The process of a company going public is highly regulated, with the main statutes coming from the early 1930s following the Great Depression. Most IPOs are undertaken with the assistance of investment banks that manage the process and sell the shares to investors in exchange for a commission. These investment banks are called underwriters, and they will usually form a syndicate with other firms to sell the shares. The underwriters will also create investor preparation decks and estimate demand in order to set a price range for the IPO.
The first step in the process of an IPO is for a firm to conduct a strategic review of its operations and goals, to see how an IPO can benefit it. This will also include a thorough research on competitors, potential investors and markets. After completing this, it will prepare an S-1 Registration Statement, which is filed with the Securities and Exchange Commission (SEC). An S-1 will be reviewed by the SEC and revised where necessary. This is the most time consuming aspect of the IPO process.
After the SEC has approved the S-1, the underwriters will then engage in more marketing and pre-marketing activities. These will likely involve a roadshow, in which senior managers will present the investment opportunity to prospective investors in several states and possibly some countries. In addition, the underwriters will publish an IPO prospectus, and they will select an underwriter for the offering and formally agree to underwriting terms through an underwriting agreement.
Underwriters take many factors into consideration when pricing an IPO, and they try to find a value for the shares that is both low enough to stimulate interest in the stock and high enough to raise the desired amount of capital. They will use a variety of valuation techniques, including discounted cash flow, equity value, comparable firm adjustments and others.
As the IPO market has become more active in recent years, it has seen the rise of special purpose acquisition companies (SPACs), which are created solely to raise money and acquire other firms. This has brought with it the need to establish a market-wide free float for these shares, which is required by most stock exchanges.
Once the IPO has been priced, the underwriters will then arrange share purchase commitments from leading institutional investors to buy the shares in the IPO. If there is a large demand for the shares, the underwriters may be required to increase the overallotment of shares they are willing to sell. This is known as a greenshoe option and can be exercised to the extent of 15% of the shares offered.
Once the IPO has been sold, the company will have to adhere to exchange and SEC regulations for public companies, which can include reporting auditable financial information on a quarterly basis. The company will also need to appoint a board of directors and establish processes for monitoring and controlling risk. initial public offering services