The Complete IPO Process from A-Z: A Guide to Going Public

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IPO Definition: What is an Initial Public Offering?

An initial public offering (IPO) is listing and selling new, publicly tradeable, shares to investors that receive an allotment from an underwriter or investment bank participating in the syndication of shares. After the IPO shares are issued to investors to raise capital and begin trading, the general public can buy or sell shares through a stock exchange. 

Why Do Companies Decide to Go Through the Process of IPO?

Companies go through the IPO (initial public offering) process to raise new capital, increase company prestige, and reward existing shareholders with a higher public valuation of shares that isn’t reduced by a private company valuation discount for lack of liquidity. Issuing public stock can finance future M&A transactions. 

We explore the IPO process meaning by defining IPO steps and answering FAQs about the initial public offering process. 

What Are the Specific Steps that A Company Takes in The IPO Process?

Step 1: Select an Investment Bank

Establish relationships with investment banks, interview them, and select a lead underwriter for your initial public offering. In selecting an investment bank for the IPO, consider industry expertise, reputation, past IPO success, investment research quality, and ability to syndicate the deal with other underwriters to attract potential investors.  

In a bake-off competition for the business, investment bankers, competing for the lead underwriter role in an IPO, present a pitch book to the corporation’s management team that includes deal evaluation, risks, and recommended valuations with suggested IPO share price. 

Step 2: Due Diligence

Pre-IPO due diligence requires assessing multi-functional aspects of the company, including reputation, internal controls, accounting policies, audit and financial results, revenue growth and business model sustainability, regulatory compliance, legal standing and agreements, financial and system readiness, corporate governance, and management team and independent Board of Directors credentials. 

Step 3: IPO Filings and Pricing 

Weeks before IPO pricing, companies issue an initial prospectus, called a red herring, that doesn’t include the IPO price, the number of shares, or the amount of money being raised. A prospectus is an SEC regulatory document (S-1 registration statement) with company information and financials for the entity planning to issue shares to raise capital. 

After rounds of SEC comments, company revisions, and SEC approval, the S-1 registration becomes effective, and the company can price and issue shares. Once a revised prospectus becomes effective, it’s no longer called a red herring. 

In a traditional IPO, share pricing is established based on book-building order feedback during the multi-city (and perhaps multi-country) road show with institutional investors and brokerage firms. Share price determination continues when potential institutional and retail investors seeking IPO share allotments express and confirm interest in buying a maximum number of newly-issued IPO shares. 

Other factors entering into IPO pricing are investment banker valuations using projected financials and similar public company market comparables based on their actual stock exchange trading and price-earnings (P/E) ratios. 

IPO pricing is a demand vs. supply issue. In an amended prospectus for offering shares filed with the SEC, the company discloses a price range for the stock in advance. On the night before the IPO, the underwriters set a final price, with agreement by the issuing company.  

Less frequently, a Dutch Auction is used to price IPO shares. 

In an IPO Dutch Auction, potential investors submit a bid price for the number of shares they would like to receive as an allotment. All IPO shareholders pay the same minimum accepted bid price for allocating all of the shares to investors. In 2004, Google used a Dutch Auction for its initial public offering. 

Step 4: Going Public

A company goes public through an IPO when its registration statement is effective, the shares have been priced by the underwriter, and trading begins on a stock exchange like Nasdaq or the  New York Stock Exchange (NYSE). 

Other methods of going public besides an IPO include:

  • merger with a publicly-held shell company
    •  using a corporate shell, or
    •  a special purpose acquisition company, known as a SPAC
  •  direct listing, serving as a secondary offering of existing, formerly-private, stockholder shares sold to public investors without an underwriter. 

Step 5: Stabilization

After the IPO is effective, shares begin trading on a stock exchange. The underwriting syndicate of investment banking firms sells a capped number of additional shares at the IPO offer price. 

Underwriters may exercise the overallotment option agreement (greenshoe option) to sell up to an extra fifteen percent of planned IPO shares and then buy back the additional IPO shares issued for market stabilization.

Step 6: Transition to Market Competition – IPO Closing

At the point of IPO closing, the priced shares will begin trading in public capital markets based on public investor demand for the shares by investors not receiving an IPO shares allotment. The stock price of an impressive company may rise by twenty percent or more on the first day of stock exchange trading. 

After going public, the company shares will compete for public investors with other companies listed on the stock market.

What Companies Should Know About the IPO Process Before  Starting

Before starting the IPO process, companies should know the steps required for completing an IPO using an IPO checklist. Businesses should understand that the systems, accounting policies,  financial statements, and legal agreements need to be scrutinized and prepared for an IPO. An impressive management team, preferably with IPO experience, must be identified.

When IPO is a Bad Idea & Alternative Strategies

An IPO may be a bad idea for your company. Perhaps you don’t want the obligations and scrutiny of going public. Or your company doesn’t have the expected growth rate required to attract public investors. Selling your business through the M&A process may be a better alternative. Consider the pros & cons of an IPO

IPO-Readiness Preparation: What Your Company Will Need in Place Before Starting Your IPO Journey

What a company should do before an IPO includes developing the business for revenue growth, having the best internal and external teams and process in place, producing reliable financial statements (including quarterly data), and generating predictable, well-analyzed results. Evaluating pre-IPO company status in IPO-relevant areas includes legal due diligence and generating new agreements. 

Preparing a company for an IPO starts with an IPO preparation checklist. Have the right management team, Board, finance employees, internal control, systems, accounting policies, business plans, analysis process, and metrics in place. Select external partners, including top-tier law and CPA firms for the audit and a lead underwriter. Practice running the company as if it’s already public. 

To prepare to go public, a company should research firms and the  IPO process, prepare questions, and select Wall Street investment banking firms to approach as potential IPO underwriters. Study your company to know how it produces revenue and operating income, if profitable. Prepare presentations to pitch your business case, including differentiated strengths and potential business risk factors. 

As IPO preparation, the company should let all employees know about the quiet period mandated by SEC regulations. The quiet period covers at least the time between the company filing a registration statement with the SEC and when the registration statement becomes “effective.” However, securities laws don’t specifically define it. The quiet period may extend beyond the IPO date. 

At the right pre-IPO time, early investors (including employees) holding the company’s shares as restricted stock or stock options need to know how an IPO will affect them as shareholders in the public market. The lock-up period (specified as 90 to 180 days from IPO date) will prevent them from selling their publicly traded stock.

External Partners in the Journey: Working With Your Investors, Bankers, & Agencies

External partners in the IPO process include VC firms, law firms, CPA firms, the lead underwriter from an investment banking firm, IPO consultants, presentation coaches, investor relations advisors, stock exchange contacts, and financial document printers. The CEO, the corporate finance team, including the CFO and Controller, and the Board, attorneys, CPAs, and investment bankers hold meetings to make well-advised IPO decisions. 

Expectations & Possible Outcomes From the Process

The IPO process will take enormous amounts of time, distract attention from running the business, possibly create conflicts, disclose company information publicly, and cost money. For a management team going through a first-time IPO, the learning curve is high.  A company must be diligent, even zealous, about its commitment to the IPO process. 

A successful IPO outcome will raise substantial capital to fund future growth through general corporate purposes and M&A deals. The IPO will have a reasonable valuation that rewards both existing and new shareholders. 

In a disappointing IPO process outcome, the IPO may not occur because of poor stock market conditions, events that reduce company financial growth expectations (including external economic events and internal events like loss of a major customer), or inadequate expected pricing levels due to lower stock demand than anticipated. 

If an IPO does occur, the stock price may trade below the IPO price without sufficient public stock demand. That would also be also a disappointing IPO outcome because could affect the price of future stock offerings and will affect company prestige. 

Frequently Asked Questions About the IPO Process

How long does the IPO process take from start to finish? 

The IPO process has no set timeline. It’s best to begin the IPO planning to IPO completion process one or two years before the planned IPO date. A pre-IPO company can prepare its strategic planning, organization, external team, financial and system capabilities, SEC filings, and stock exchange listing application, and practice for future public reporting and conference calls. 

How is an IPO priced?

Before an IPO, underwriters and the issuing company agree on a valuation and offering price range included in an amended prospectus for offering IPO shares. Underwriters determine a specific offering price for new stockholders on the IPO day to buy IPO shares through underwriter allotment. 

The IPO offer price may be within the initial range, or higher or lower in a revised range, depending on IPO share demand factors. 

How is the offering price determined?

The offering share price for an IPO is based on valuation, company growth estimates, comparables with public companies, the demand level expressed by potential investors as an indication of interest in buying a specified maximum number of shares, and the ability for new shareholders to profit from their IPO share allocation. 

What do existing shareholders need to know during the IPO process?

Existing shareholders should know that their restricted shares will be reissued upon IPO, a stock split may occur before the IPO to add trading liquidity, a pre-IPO quiet period and post-IPO lock-up period will occur, confidential business and financial information must not leak before or after the IPO, and friends and family IPO shares may be available for direct allotment.

How long after IPO filing can you go public?

Estimate four months between filing your S-1 registration statement with the Securities and Exchange Commission, responding to SEC review comments, the underwriters and issuing company determining a price range for IPO shares, completing SEC amended filings, holding the road show (for two weeks), final pricing, and issuing allotted IPO shares to new shareholders when the company goes public. 

Days after the IPO, upon settlement of net proceeds (gross proceeds less underwriting fees), the issuing company will receive funds for the IPO capital raise from the primary underwriter. 

What Is the Difference between Going Public and IPO?

The difference between going public and IPO is that going public includes all of the ways to become a public company, including initial public offering (IPO) of new shares, direct listing of existing shareholders’ stock, and reverse merger with a shell company. 

How do you maximize the chances of IPO allotment? 

Having a profitable relationship with substantial assets invested with your brokerage, expressing confirmed IPO indication of interest for a maximum number of shares, and meeting your brokerage firm’s criteria and FINRA IPO requirements will maximize your chances of IPO shares allotment. Being friends, family, or an existing shareholder increases chances of direct allotment by the issuer. 

Investment bankers prefer to allot IPO shares to investors with a track record of holding rather than flipping initial public offering shares. 

What are the different types of IPOs Issued?

Types of IPOs issued are fixed price, also known as book building, and Dutch Auction

For a fixed price IPO, the underwriter and issuer agree on a specific valuation price for the IPO after asking potential investors on the road show about their pricing opinions for buying stock in the IPO and order level desired. In a Dutch Auction IPO process, potential IPO investors bid for shares. The minimum acceptable price to allocate all shares becomes the IPO price. 

How big does a company have to be to go public?

How big a company has to be to go public is based on New York Stock Exchange (NYSE) or Nasdaq listing requirements, the SEC’s Exchange Act of 1934, Section 12(g) requirements for assets or number of includable existing shareholders, and the recommendations of the company’s Board of Directors and advisors. Minimum company size for an IPO varies. 

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