What is an IPO?
An initial public offering (IPO) is the event of a company first selling its shares to the public. Due to unseasoned trading and lack of information, equities are often referred to as IPOs for months, if not years, following their debuts. Stocks that trade on the OTC or international markets are often called IPOs when they first offer shares on the Nasdaq or NYSE.
IPOs raise fresh capital to fuel expansion or acquisitions, and allow companies to tap capital markets in the future. An IPO also provides liquidity for investors, founders, and employees. Widely covered by the financial press, an IPO is a marketing event that builds brand awareness. Executives, employees, customers, suppliers and other partners value the transparency and permanence of working with a public company.
A company begins the IPO process years in advance, bringing on a CFO, an auditor, a law firm, independent directors, and others. When it is ready, the company will have a beauty contest, selecting a lead manager, joint bookrunners, and other investment banks to underwrite the deal. More often than not, it will first submit a confidential filing, so that it can privately hash out the required disclosures with the SEC staff. A public filing then follows, with the preliminary prospectus available on EDGAR. As soon as 15 days later, the company can file the proposed terms of the offering and launch its IPO roadshow. This is where management pitches its strategy to the buy side. After the roadshow, the company and the lead manager decide on an IPO price, and the stock begins trading the following day.
Going public is an expensive and time-consuming process, in large part due to regulations designed to protect investors.
Renaissance Capital's IPO University is a helpful guide for getting up to speed on the basics of IPO investing, following the market, and understanding common terms.
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