What is an IPO?
An initial public offering (IPO) is the process by which a private company “goes public” and sells new shares on the stock market. An IPO allows a company to unlock new growth and raise capital from public investors as well as provide private investors with the opportunity to exit their investment and realize a profit.
Before undergoing an IPO, a company must go through an extensive IPO process, including meeting certain requirements as set by the Securities and Exchange Commission (SEC).
In our infographic below, we’ll outline the steps involved in the IPO process at a high level and then dive deeper into frequently asked questions for a more comprehensive look.
What are the alternatives to a traditional IPO?
In recent years, more companies are choosing to forgo the IPO route. Instead, opting for alternative methods to listing on the public market.
Direct listing vs IPO
In a direct listing (also known as a direct public offering), a private company will go public by selling shares to investors on the stock exchanges without an IPO. Direct listings eliminate the need for an IPO roadshow or IPO underwriter, which saves the company time and money. Historically, this method has been used primarily by budget-conscious small businesses seeking to avoid the abundance of fees associated with traditional IPOs.
Additionally, direct listings give shareholders the opportunity to sell their stake in the company as soon as it goes public, without experiencing the holding period they normally would with an IPO. This can also help avoid the dilution that issuing new shares could cause. We explore the differences between a direct listing and an IPO in more depth in another article.
SPAC vs IPO
A special purpose acquisition company (SPAC) is a publicly-traded buyout company that raises capital through an IPO in order to purchase or gain a controlling stake in a company. When a company gets acquired by a SPAC, it goes public without paying for an IPO because all fees and underwriting costs are covered before the target company ever gets involved.
When the coronavirus pandemic rattled many IPO plans, SPACs kept going public. One reason is that a SPAC's value is tied to how much it raised from investors, so it's less susceptible to the ups and downs of the market. We explore the differences between SPACs, traditional IPOs and direct listings in another article.
Traditional IPO vs SPAC vs DPO
Direct listing or DPO
Quick FAQ on the IPO process
How long does it take to complete the IPO process?
The IPO process is complex and the amount of time it takes depends on many factors. If the team managing the IPO is well organized, then it will typically take six to nine months for the company to complete its public debut. The transition from private to public is a demanding process and incurs a lot of expenses for the issuing company.
What is an underwriter and how do you choose one to work with?
An IPO underwriter is synonymous with the investment bank providing the underwriting service. Underwriters lead the IPO process and are chosen by the company, which could decide to hire a team of underwriters to manage different parts of the IPO.
The success of an IPO relies heavily on choosing the right underwriter. Companies will look at a firm’s reputation, their quality of research and industry expertise when considering investment banks to work with. After choosing an IPO underwriter, the two parties will formally agree to terms through an underwriting agreement. This includes the amount of capital the underwriter receives during the IPO, which is typically between five and eight percent.
Who is a part of the IPO team?
The IPO team consists of executives at the issuing company, underwriters, lawyers, certified public accountants (CPAs) and Securities and Exchange Commission (SEC) experts. This team is responsible for taking the company through the IPO process, handling the complex transition from private to public and every important decision that accompanies the journey.
What is IPO due diligence?
Due diligence is a standard process for any investment workflow. For IPOs, it is an investigation into the private company’s financials and the potential risk factors of going public. During this workflow, the company and IPO underwriters will fill out the required paperwork. The issuing company will also register with the SEC.
What documents have to be filled out for the IPO process?
Companies are required to fill out and submit several pieces of documentation, including financial statements, throughout the IPO journey. Here’s a quick overview of each:
|Agreeing to terms with underwriter and issuing company:|
|The underwriter will draft:|
|Required documentation by the SEC:|
What is an IPO roadshow?
The IPO roadshow is a company’s chance to market and drum up interest for shares. It is also a way to gauge demand for shares, helping the underwriters navigate the IPO process. Traditionally, the company and underwriters travel to different locations—however, digital roadshows became the norm during the COVID-19 pandemic and have the potential to become the standard moving forward.
How are IPOs valued and priced?
Pricing and valuing an IPO depends on many factors, not just the company itself. Market conditions and demand also play a strong role in the valuation. There are a couple intrinsic and relative valuation methods that are used to value a company:
- Discounted cash flow analysis, an intrinsic valuation method that looks at the value of an investment based on its projected future cash flows.
- Comparable public company analysis, a relative valuation method that compares publicly traded companies operating in a similar sector and location to the valuation company, usually with similar levels of revenue and market capitalization.
- Precedent translation or private comparable analysis, a relative valuation method that looks at historical prices for completed deals within the private markets that involve similar companies.
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