When a privately held company issues shares of its ownership to the general public for the first time, that is called an Initial Public Offering, or IPO. Thus, an IPO is literally the transition of ownership from a private entity to the public, where anyone owning a brokerage account can buy a piece of the firm.
This procedure alters the way of business, the owners of the firm, as well as how it raises funds. A number of companies undergo expansion before becoming public.
In this manual, we will cover what an initial public offering is, who takes part in it, the reason for the choice of this option by companies, as well as the stages involved will be examined. We should begin with the fundamentals.
IPO Meaning and Basics
An IPO is the process where a private company offers its shares to the general public on a stock exchange. Before an IPO, a company's shares are held by founders, early employees, venture capitalists, and other private investors. After an IPO, shares become purchase-able by institutional or individual investors.
In this process, a firm has to file with the national securities regulators-the Securities and Exchange Commission in the United States-and determine a price for its shares. The firm then lists its shares on a stock exchange-like the NYSE or Nasdaq. At that point-trading is opened-company becomes subject to public reporting requirements and shareholder accountability.
The sold shares can be newly created-raising fresh capital for the company-or existing shares sold by early investors and founders that allow them to cash out. Most IPOs include a little of both.
Who Is Involved in an IPO
Several parties work together to execute an IPO:
Investment Banks (Underwriters)
These companies manage the whole process. These companies help fix the offering price, purchase shares from the company, and then distribute to investors. Some of the firms that engage in IPO underwriting include Goldman Sachs, Morgan Stanley, and JPMorgan. In most cases, these firms manage the risk through a syndicate of banks.
Company Management
The CEO, CFO, and board of directors make strategic decisions about timing, pricing, and how much of the company to sell. They also participate in roadshows to pitch the company to potential investors.
Lawyers
Both the company and the underwriters employ lawyers to manage the filing process for regulatory approvals, the preparation of the prospectus, and so on.
Accountants and Auditors
These professionals verify the company's financial statements and ensure they meet public company accounting standards. The numbers in the prospectus must be accurate and audited.
Securities Regulators
The SEC reviews the company's registration statement and prospectus to ensure adequate disclosure. They don't evaluate whether the stock is a good investment, only that information is properly disclosed.
Institutional Investors
Mutual funds, pension funds, or hedge funds get the biggest number of shares in IPOs. They are able to get shares since they have the money. Additionally, they often know people who help them get shares.
Retail Investors
Individual investors can participate, though they often receive smaller allocations or buy shares after trading begins.
Why Companies Go Public
Companies pursue IPOs for specific reasons:
- Raise capital: An IPO provides large amounts of funding for growth, expansion, debt reduction, or acquisitions. Rivian raised $12 billion in its 2021 IPO to scale electric vehicle production.
- Provide liquidity for early investors
Founders, venture firms, and employees gain a public market where they can sell shares. This liquidity event often appears in early investment terms.
- Support acquisitions: Public shares work as acquisition currency. Companies use stock instead of cash to buy other businesses.
- Increase credibility and visibility: Public listing raises a company’s profile and signals stability. This helps with partnerships, customers, and hiring.
- Strengthen employee compensation: Public stock makes equity awards more attractive since shares are easier to sell.
- Establish a market valuation: A traded share price sets a clear valuation for compensation, financing, and deal discussions.
How an IPO Works
The IPO process usually takes six months to a year. Timing varies based on market conditions, company readiness, and regulatory review.
Preparation
The company selects underwriters after several investment banks present a valuation and distribution plan. Then, the S-1 filing is prepared by lawyers, accountants, and bankers, which discloses financials, risks, and use of proceeds.
Meanwhile, governance and reporting are upgraded in tandem by the company. It establishes an independent board, completes audits, and then fixes any accounting gaps before filing.
Pricing and Book Building
After filing, the company enters a quiet period while regulators review disclosures. Once approved, underwriters collect demand from institutional investors to set a price range.
The final price is determined just ahead of the opening of trading. Strong demand pushes pricing higher, while weaker demand reduces it. Most shares are allocated to institutions with limited retail allocation.
Roadshow
For this, executives meet investors to explain their business and answer queries. These meetings happen in major financial centers and online.
Investor confidence in management often shapes demand and final pricing.
Public Trading Start
Shares begin trading on an exchange, often with high volatility. Underwriters may support the price during early trading if needed.
A lock-up period follows, usually lasting 180 days. Insiders cannot sell shares until it ends, which can affect the stock price later.
Types of IPOs and Alternatives
Not all public offerings follow the traditional path to IPO:
- Traditional IPO: This is the underwritten offering previously discussed. Investment banks purchase shares from the company and resell to investors. This is the most common approach.
- Direct Listing: A company lists shares directly on an exchange without underwriters and without raising new capital. In this case, existing shareholders will be selling directly to the public. Spotify and Slack have used this method simply to avoid dilution and underwriting fees. There is no price support that is guaranteed.
- Dutch Auction: This is a mechanism wherein investors actually bid for shares, and the price is determined by a demand curve. Google, for instance, utilised this in 2004. It is designed to be democratic, better retail investor access; however, the system has not gained favour due to its complexity and unpredictability.
- SPAC Merger: A Special Purpose Acquisition Company, better known as a blank check company, goes public and then merges with a private company. The private company becomes public through a merger. Tremendously popular in 2020-2021 but since cooled due to regulatory scrutiny and the generally poor performance of many SPAC deals.
- Reg A+ Offering: A simplified process applied for smaller companies raising up to $75 million. It has fewer disclosure requirements compared to full IPO but the ability for public trading is preserved. Used primarily by startups and regional businesses.
IPO Pros and Cons (Company View)
| Advantages |
Disadvantages |
| Access to large pools of capital for growth, acquisitions, and debt reduction |
High costs including underwriting fees, legal expenses, and ongoing compliance |
| Liquidity for founders, employees, and early investors who are able to sell shares |
Loss of control as new shareholders gain voting rights and influence decisions |
| Stronger public profile and credibility with customers, partners, and recruits |
Quarterly earnings pressure and short term focus driven by market expectations |
| Stock serves as acquisition currency for purchasing other companies |
Extensive disclosure exposes financials, strategy, and competitive information |
| Improved ability to attract talent through liquid equity compensation |
Management time shifts toward investor relations and regulatory obligations |
| Clear benchmark valuation from public market pricing |
Exposure to market volatility and hostile takeover risk |
| Easier access to future capital through follow on offerings |
Lock up periods restrict insider share sales after the IPO |
What Investors Should Know
IPOs carry risks that differ from established public stocks. Limited history and heavy marketing often make pricing harder to judge.
Key points to keep in mind:
- - IPOs have little or no public trading history, which complicates valuation
- - First-day price jumps often reflect hype rather than fundamentals
- - Lock-up expirations, usually around 180 days, often lead to selling pressure
- - Companies often go public during strong market conditions
- - Underwriters represent the company’s interests, not the investor’s
- - Most shares go to institutional buyers, with limited access for retail investors
- - The prospectus lists major risks, yet many investors skip reading it
- - Growth narratives often matter more than profitability at launch
- - Long-term performance is mixed, with many IPOs lagging broader markets
- - Insiders have more information and often sell while public investors buy
Always read the S-1 registration statement before investing. Pay close attention to risk factors, cash flow, and how the company plans to use IPO proceeds. Heavy cash burn or a focus on insider liquidity rather than business growth signals added risk.
IPO vs Direct Listing
| Aspect |
IPO |
Direct Listing |
| New capital raised |
Yes |
No |
| Underwriters |
Required |
Not required |
| Price discovery |
Before listing |
During trading |
| Dilution |
Yes |
No |
Common IPO Misconceptions
"IPOs are always good investments" – Historical data shows mixed results. While some IPOs like Amazon and Google created enormous wealth, many decline after their initial pop. The majority of IPO returns come from a small percentage of big winners.
"A first-day pop means the company is successful" – A large first-day gain often means the company priced too low and left money on the table. It benefits early investors who flip shares, not the company or long-term shareholders.
"Only profitable companies can go public" – Many unprofitable companies have successful IPOs if they show strong revenue growth and a path to profitability. Uber, Lyft, and Snowflake all went public while losing money.
"The underwriter sets a fair price" – Underwriters balance competing interests. They want to satisfy the company (their client) with a high price, but also ensure institutional investors (their ongoing customers) make money. This creates incentives to underprice.
"You can easily buy IPO shares at the offering price" – Most retail investors buy on the open market after trading begins, often at a higher price. Allocation to retail investors is limited and typically goes to clients of the underwriting banks.
"Going public means a company is financially healthy" – Some companies go public because they need capital urgently or early investors want to exit. WeWork tried to IPO in 2019 despite major financial issues, which only became clear during the IPO process.
"The SEC approves the offering" – The SEC only ensures adequate disclosure. They don't evaluate whether the investment is sound or the company is well-managed.
Bottom Line
An IPO signals the end of private ownership and the beginning of public ownership. An IPO provides businesses with funding, liquidity for initial parties, and publicity. In exchange, businesses face increased expenses, public scrutiny, and regulatory compliance.
Companies should consider making an initial public offering that meets their strategic plans. Concerning investors, initial public offerings should be viewed as opportunities with certain levels of risk attached. It is important to base one’s judgment on fundamentals, scrutinize the prospectus, or do not buy into hype that characterized the initial stages of initial public offerings. Many great initial public offerings evolve into better investment opportunities after the initial periods of turbulence.
Frequently Asked Questions
What does IPO stand for?
IPO stands for Initial Public Offering, the process of a private company selling shares to the public for the first time.
How long does the IPO process take?
Usually takes about six months to one year from selection of underwriters through trading, but can be sooner or later depending on company preparation levels among other factors.
Can anyone buy IPO shares?
Technically speaking, yes, but IPO shares are mostly allocated to institutional investors and clients of the syndicate banks. Individual investors buy shares later when trading starts.
Why do some IPOs fail?
IPOs can fail due to poor market timing, weak business fundamentals, inadequate investor demand, regulatory issues, or negative news during the process.
What is a lock-up period?
A term (generally 180 days) that prevents insiders from selling their shares after an initial public offering. It is called a “lockup period” since it “locks up” the shares for a certain term of time after the initial public offering
How much does an IPO cost?
Underwriting fees typically run 5-7% of proceeds, plus legal, accounting, and compliance costs that can add several million dollars.
What's the difference between an IPO and a direct listing?
An IPO involves underwriters buying and reselling shares while raising capital; a direct listing allows existing shareholders to sell directly without raising new money.
Do companies have to be profitable to go public?
No. Some growth firms go public while still unprofitable if they show robust revenue growth and a viable plan for becoming profitable.
When a privately held company issues shares of its ownership to the general public for the first time, that is called an Initial Public Offering, or IPO. Thus, an IPO is literally the transition of ownership from a private entity to the public, where anyone owning a brokerage account can buy a piece of the firm.
This procedure alters the way of business, the owners of the firm, as well as how it raises funds. A number of companies undergo expansion before becoming public.
In this manual, we will cover what an initial public offering is, who takes part in it, the reason for the choice of this option by companies, as well as the stages involved will be examined. We should begin with the fundamentals.
IPO Meaning and Basics
An IPO is the process where a private company offers its shares to the general public on a stock exchange. Before an IPO, a company's shares are held by founders, early employees, venture capitalists, and other private investors. After an IPO, shares become purchase-able by institutional or individual investors.
In this process, a firm has to file with the national securities regulators-the Securities and Exchange Commission in the United States-and determine a price for its shares. The firm then lists its shares on a stock exchange-like the NYSE or Nasdaq. At that point-trading is opened-company becomes subject to public reporting requirements and shareholder accountability.
The sold shares can be newly created-raising fresh capital for the company-or existing shares sold by early investors and founders that allow them to cash out. Most IPOs include a little of both.
Who Is Involved in an IPO
Several parties work together to execute an IPO:
Investment Banks (Underwriters)
These companies manage the whole process. These companies help fix the offering price, purchase shares from the company, and then distribute to investors. Some of the firms that engage in IPO underwriting include Goldman Sachs, Morgan Stanley, and JPMorgan. In most cases, these firms manage the risk through a syndicate of banks.
Company Management
The CEO, CFO, and board of directors make strategic decisions about timing, pricing, and how much of the company to sell. They also participate in roadshows to pitch the company to potential investors.
Lawyers
Both the company and the underwriters employ lawyers to manage the filing process for regulatory approvals, the preparation of the prospectus, and so on.
Accountants and Auditors
These professionals verify the company's financial statements and ensure they meet public company accounting standards. The numbers in the prospectus must be accurate and audited.
Securities Regulators
The SEC reviews the company's registration statement and prospectus to ensure adequate disclosure. They don't evaluate whether the stock is a good investment, only that information is properly disclosed.
Institutional Investors
Mutual funds, pension funds, or hedge funds get the biggest number of shares in IPOs. They are able to get shares since they have the money. Additionally, they often know people who help them get shares.
Retail Investors
Individual investors can participate, though they often receive smaller allocations or buy shares after trading begins.
Why Companies Go Public
Companies pursue IPOs for specific reasons:
- Raise capital: An IPO provides large amounts of funding for growth, expansion, debt reduction, or acquisitions. Rivian raised $12 billion in its 2021 IPO to scale electric vehicle production.
- Provide liquidity for early investors
Founders, venture firms, and employees gain a public market where they can sell shares. This liquidity event often appears in early investment terms.
- Support acquisitions: Public shares work as acquisition currency. Companies use stock instead of cash to buy other businesses.
- Increase credibility and visibility: Public listing raises a company’s profile and signals stability. This helps with partnerships, customers, and hiring.
- Strengthen employee compensation: Public stock makes equity awards more attractive since shares are easier to sell.
- Establish a market valuation: A traded share price sets a clear valuation for compensation, financing, and deal discussions.
How an IPO Works
The IPO process usually takes six months to a year. Timing varies based on market conditions, company readiness, and regulatory review.
Preparation
The company selects underwriters after several investment banks present a valuation and distribution plan. Then, the S-1 filing is prepared by lawyers, accountants, and bankers, which discloses financials, risks, and use of proceeds.
Meanwhile, governance and reporting are upgraded in tandem by the company. It establishes an independent board, completes audits, and then fixes any accounting gaps before filing.
Pricing and Book Building
After filing, the company enters a quiet period while regulators review disclosures. Once approved, underwriters collect demand from institutional investors to set a price range.
The final price is determined just ahead of the opening of trading. Strong demand pushes pricing higher, while weaker demand reduces it. Most shares are allocated to institutions with limited retail allocation.
Roadshow
For this, executives meet investors to explain their business and answer queries. These meetings happen in major financial centers and online.
Investor confidence in management often shapes demand and final pricing.
Public Trading Start
Shares begin trading on an exchange, often with high volatility. Underwriters may support the price during early trading if needed.
A lock-up period follows, usually lasting 180 days. Insiders cannot sell shares until it ends, which can affect the stock price later.
Types of IPOs and Alternatives
Not all public offerings follow the traditional path to IPO:
- Traditional IPO: This is the underwritten offering previously discussed. Investment banks purchase shares from the company and resell to investors. This is the most common approach.
- Direct Listing: A company lists shares directly on an exchange without underwriters and without raising new capital. In this case, existing shareholders will be selling directly to the public. Spotify and Slack have used this method simply to avoid dilution and underwriting fees. There is no price support that is guaranteed.
- Dutch Auction: This is a mechanism wherein investors actually bid for shares, and the price is determined by a demand curve. Google, for instance, utilised this in 2004. It is designed to be democratic, better retail investor access; however, the system has not gained favour due to its complexity and unpredictability.
- SPAC Merger: A Special Purpose Acquisition Company, better known as a blank check company, goes public and then merges with a private company. The private company becomes public through a merger. Tremendously popular in 2020-2021 but since cooled due to regulatory scrutiny and the generally poor performance of many SPAC deals.
- Reg A+ Offering: A simplified process applied for smaller companies raising up to $75 million. It has fewer disclosure requirements compared to full IPO but the ability for public trading is preserved. Used primarily by startups and regional businesses.
IPO Pros and Cons (Company View)
| Advantages |
Disadvantages |
| Access to large pools of capital for growth, acquisitions, and debt reduction |
High costs including underwriting fees, legal expenses, and ongoing compliance |
| Liquidity for founders, employees, and early investors who are able to sell shares |
Loss of control as new shareholders gain voting rights and influence decisions |
| Stronger public profile and credibility with customers, partners, and recruits |
Quarterly earnings pressure and short term focus driven by market expectations |
| Stock serves as acquisition currency for purchasing other companies |
Extensive disclosure exposes financials, strategy, and competitive information |
| Improved ability to attract talent through liquid equity compensation |
Management time shifts toward investor relations and regulatory obligations |
| Clear benchmark valuation from public market pricing |
Exposure to market volatility and hostile takeover risk |
| Easier access to future capital through follow on offerings |
Lock up periods restrict insider share sales after the IPO |
What Investors Should Know
IPOs carry risks that differ from established public stocks. Limited history and heavy marketing often make pricing harder to judge.
Key points to keep in mind:
- - IPOs have little or no public trading history, which complicates valuation
- - First-day price jumps often reflect hype rather than fundamentals
- - Lock-up expirations, usually around 180 days, often lead to selling pressure
- - Companies often go public during strong market conditions
- - Underwriters represent the company’s interests, not the investor’s
- - Most shares go to institutional buyers, with limited access for retail investors
- - The prospectus lists major risks, yet many investors skip reading it
- - Growth narratives often matter more than profitability at launch
- - Long-term performance is mixed, with many IPOs lagging broader markets
- - Insiders have more information and often sell while public investors buy
Always read the S-1 registration statement before investing. Pay close attention to risk factors, cash flow, and how the company plans to use IPO proceeds. Heavy cash burn or a focus on insider liquidity rather than business growth signals added risk.
IPO vs Direct Listing
| Aspect |
IPO |
Direct Listing |
| New capital raised |
Yes |
No |
| Underwriters |
Required |
Not required |
| Price discovery |
Before listing |
During trading |
| Dilution |
Yes |
No |
Common IPO Misconceptions
"IPOs are always good investments" – Historical data shows mixed results. While some IPOs like Amazon and Google created enormous wealth, many decline after their initial pop. The majority of IPO returns come from a small percentage of big winners.
"A first-day pop means the company is successful" – A large first-day gain often means the company priced too low and left money on the table. It benefits early investors who flip shares, not the company or long-term shareholders.
"Only profitable companies can go public" – Many unprofitable companies have successful IPOs if they show strong revenue growth and a path to profitability. Uber, Lyft, and Snowflake all went public while losing money.
"The underwriter sets a fair price" – Underwriters balance competing interests. They want to satisfy the company (their client) with a high price, but also ensure institutional investors (their ongoing customers) make money. This creates incentives to underprice.
"You can easily buy IPO shares at the offering price" – Most retail investors buy on the open market after trading begins, often at a higher price. Allocation to retail investors is limited and typically goes to clients of the underwriting banks.
"Going public means a company is financially healthy" – Some companies go public because they need capital urgently or early investors want to exit. WeWork tried to IPO in 2019 despite major financial issues, which only became clear during the IPO process.
"The SEC approves the offering" – The SEC only ensures adequate disclosure. They don't evaluate whether the investment is sound or the company is well-managed.
Bottom Line
An IPO signals the end of private ownership and the beginning of public ownership. An IPO provides businesses with funding, liquidity for initial parties, and publicity. In exchange, businesses face increased expenses, public scrutiny, and regulatory compliance.
Companies should consider making an initial public offering that meets their strategic plans. Concerning investors, initial public offerings should be viewed as opportunities with certain levels of risk attached. It is important to base one’s judgment on fundamentals, scrutinize the prospectus, or do not buy into hype that characterized the initial stages of initial public offerings. Many great initial public offerings evolve into better investment opportunities after the initial periods of turbulence.
Frequently Asked Questions
What does IPO stand for?
IPO stands for Initial Public Offering, the process of a private company selling shares to the public for the first time.
How long does the IPO process take?
Usually takes about six months to one year from selection of underwriters through trading, but can be sooner or later depending on company preparation levels among other factors.
Can anyone buy IPO shares?
Technically speaking, yes, but IPO shares are mostly allocated to institutional investors and clients of the syndicate banks. Individual investors buy shares later when trading starts.
Why do some IPOs fail?
IPOs can fail due to poor market timing, weak business fundamentals, inadequate investor demand, regulatory issues, or negative news during the process.
What is a lock-up period?
A term (generally 180 days) that prevents insiders from selling their shares after an initial public offering. It is called a “lockup period” since it “locks up” the shares for a certain term of time after the initial public offering
How much does an IPO cost?
Underwriting fees typically run 5-7% of proceeds, plus legal, accounting, and compliance costs that can add several million dollars.
What's the difference between an IPO and a direct listing?
An IPO involves underwriters buying and reselling shares while raising capital; a direct listing allows existing shareholders to sell directly without raising new money.
Do companies have to be profitable to go public?
No. Some growth firms go public while still unprofitable if they show robust revenue growth and a viable plan for becoming profitable.
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