A successful IPO brings financial resources to the company and creates a good basis for capital growth. So, in this article, we will consider how does a private company go public, and what are the benefits.
What is IPO?
The initial placement of securities on the stock exchange is called IPO – Initial Public Offering. Most often, participation in an IPO is understood as an application for the purchase of securities before the first day of trading. Private investors send it to a broker to receive securities on a brokerage account before they appear in free sale on the stock exchange.
The placement price is known in advance, but how it will behave after the opening of trading is unknown. The expectations and plans of investors, analysts, and top managers do not always come true. IPO objectives are:
- attracting new capital to the company from a wide range of investors;
- obtaining an objective market valuation of the asset;
- creating liquidity in the assets of existing shareholders;
- obtaining trader shares that can be used for M&A.
An IPO enables a company to raise significant financial resources from various investors on fairly favorable terms. Investors, on the other hand, receive a small “share” of the company’s business and become co-owners of this company. After entering the stock exchange, the status of the company changes – from private, it becomes public, and its shares are freely traded on the stock exchange and can be bought by anyone.
How to organize the initial public offering?
Entering the IPO market is not easy, the company must meet some requirements. Depending on whether the company is placed on the main or alternative market, such requirements may be:
- three-year or annual reporting following international accounting standards (IAS), certified by a leading audit company;
- a clear and transparent organizational structure of the business;
- good indicators of profitability and profitability;
- a strong development strategy;
So, having decided to go public, the company needs to carefully carry out all the preparatory work: fulfill the due diligence requirements to form a comprehensive objective view of the company, implement a budget management system, create a unified system of accounting, tax, and management accounting, monitor the company’s profitability on throughout each reporting period, develop a clear methodology for changes in the company’s business processes and prepare staff for the implementation of all innovations. The choice of a platform for the placement of shares depends on the size of the company and plans to raise capital.
The IPO process consists of several stages:
- The preliminary stage is preparation within the company: reporting, business assessment, independent audit. This stage is the longest and can last several years.
- Underwriters are financial institutions that evaluate the expected value of shares.
- Listing – inclusion of shares in the quotation list. The exchange checks if the company meets the requirements and registers the securities on the trading floor.
- Attracting investors. The underwriter talks about the IPO to large investors who may be interested in buying securities.
- Collection of applications and price determination. The placement price can be clearly defined in advance or formed based on the order book.
- Start of trading. At the beginning of trading on the stock exchange, the price can immediately go up or down, it depends on supply and demand, investor interest in the company.
- Lock-up period. This is a ban on investors from selling securities for some time. It is needed so that after the release of securities they do not collapse sharply.