Initial Public Offerings (IPOs) are the first sale of stock by a private company to the public. Companies can use it to raise new equity capital for expansion or other purposes. IPOs are often associated with high-growth companies, and there are several reasons why companies may choose to go public. Going public can provide a company with new capital to invest in growth, help to expand its operations, and make it more visible to potential customers and partners. When a private company goes public, it is an opportune moment for original private investors to profit from their investment. This is usually done by issuing shares at a premium price, which lets public investors get in on the action too. When a firm reaches a certain point in its development where it needs to raise capital, one option it may consider is an initial public offering. A private company going public raises money by issuing and selling shares of itself in a process called an IPO. It is a massive undertaking for a private company because it must now answer to shareholders, provide regular financial reports, and comply with the Securities and Exchange Commission (SEC) regulations. The company also undergoes a significant change in ownership structure, from private ownership to public ownership. Typically, when a company's private valuation reaches around $1 billion, it is often ready to go public. This is known as unicorn status. Private firms at various valuations with strong fundamentals and demonstrated profitability potential can also qualify for an IPO, depending on the market competition and their capacity to satisfy listing standards. To pull off an IPO, the company must first determine how many shares to sell and at what price. This is done through a process of share underwriting, where investment banks commit to buying up the securities of the issuing entity and then sell them in the market. The number of shares and the price at which they are sold will determine the amount of money the company raises in its IPO. The shareholders’ equity will also increase by the amount of money raised in the IPO. The money raised from an IPO can be used to finance operations, expand businesses, or pay off debt. Overall, an IPO is a significant event for any company. It is a complex process that requires careful planning and execution. But it can also be rewarding, providing the company with much needed capital to grow its business. IPOs have been around for centuries. In 1602, the Dutch East India Company was the first company to offer shares to the public. There have been many notable IPOs throughout history. Some examples are the First Bank of the United States IPO in 1791 and the IPO of The Coca-Cola Company in 1919. One notable example of a modern company that went public through an IPO is Facebook. Facebook's IPO took place on May 18, 2012. Facebook's IPO was the most significant in the history of technology IPOs. Today, IPOs are a common and critical source of capital for high-growth companies. In 2019, there were more than 1,000 IPOs globally, raising a total of more than $100 billion. The process of going public can be complex and time-consuming, and it typically involves the services of investment bankers, lawyers, and accountants. The following are the steps involved in the IPO process: The first step is to develop a proposal or so-called "book" that outlines the company's business plan, financial situation, and investment opportunity. This book is then sent to potential underwriters, who are banks or securities firms that help sell the stock to investors. Once an underwriter is selected, the company and underwriter will sign an agreement in which the underwriter agrees to buy all of the shares being offered by the company at a set price (the "offer price"). The agreement also typically includes an "over-allotment option," which gives the underwriter the right to purchase additional shares (up to 15% of the total offering) if demand for the stock is high. After the underwriting agreement is in place, the IPO team (which typically includes investment bankers, lawyers, and accountants) works on putting together the necessary paperwork for the SEC filing. The company must file a registration statement with the SEC, which outlines the terms of the offering and discloses information about the company's business, financial situation, and risk factors. The registration statement becomes effective after it is reviewed and declared effective by the SEC. After the SEC has cleared the offering, the underwriter will go on a "road show" to market the stock to potential investors. During this time, the company's management team will meet with institutional investors, such as mutual fund managers and pension funds, to try to get them interested in buying the stock. The investment banks set the IPO price based on their assessment of investor demand. Once the offering price is set, the company will sell its shares to the underwriters at that price. The shares are then distributed to the underwriters' clients, and trading of the stock begins on the open market. Institutional investors often buy large blocks of stock when a company goes public, so they can sell them later at a profit. Individual investors can also participate in IPOs by buying shares through a broker. After an IPO, some clauses may be put into place- for example, underwriters may have a set amount of time to buy more shares after the IPO date. However, certain investors might fall under quiet periods during this time. The company will then be required to file periodic financial reports with the SEC. The company's stock will also be listed on a stock exchange, such as the NYSE or Nasdaq. The company will now be subject to all the rules and regulations that apply to public companies. IPOs can provide a number of benefits to companies, including the following: IPOs can be a significant source of capital for high-growth companies. The proceeds from an IPO can be used to finance expansion, pay off debt, or for general corporate purposes. Going public can increase a company's visibility and give it more credibility with customers, suppliers, and employees. It can also make it easier to attract top talent. An IPO can create shareholder value by providing liquidity for early investors and founders and by giving the company access to a larger pool of potential investors. Some risks and drawbacks are associated with going public via an IPO. The IPO process can be costly and time-consuming, and there is no guarantee that the offering will be successful. Costs are borne by the company, not the underwriters. Once a company goes public, it will be subject to increased SEC scrutiny and will be required to disclose more information about its business. This can make it more difficult to operate in a competitive environment. Going public typically means that a company will have to give up some control. For example, shareholders will have a say in major decisions, and the company will be subject to greater scrutiny from regulators, the media, and the public. The stock price of a newly public company can be volatile, particularly in the first few months after the IPO. This can create concerns for management and make it difficult to raise additional capital. Public companies are under pressure to maintain or increase their stock price and meet quarterly earnings estimates. This can lead to short-term decision making and pressure on management. Several factors can affect the performance of an IPO, including the economic conditions at the time of the offering, the company's financial condition, the sector in which it operates, and investor sentiment. In general, IPOs tend to perform poorly in bear markets and during periods of economic uncertainty. They also tend to underperform the market in the short term, but there is evidence that they outperform over the long term. The following are some of the key considerations for IPO performance: The lock-up period is the time after the IPO when insiders (such as employees and early investors) are prohibited from selling their shares. This period typically lasts 180 days, with a minimum of 90 days per SEC law. After the lock-up period expires, a "flood" of insider selling can put downward pressure on the stock price. The SEC's "quiet period" regulations restrict a company's ability to promote its IPO in the weeks following the offering. As a result, there is typically a lull in news and excitement surrounding a company in the weeks before its IPO. This can lead to lower than expected demand and poor performance on the first day of trading. Flipping is the practice of buying shares in an IPO and then selling them immediately after the stock begins trading. This can lead to a decline in the stock price as demand from long-term investors is replaced by supply from flippers looking to make a quick profit. In 2024, the financial sector is preparing for several significant initial public offerings (IPOs) that are poised to make a substantial impact on the market. 1. Skims To stay updated on upcoming IPOs, check out an IPO calendar, which lists all of the upcoming IPOs. They can be found on many different websites, such as Yahoo! Finance and Nasdaq. Another way to find out about upcoming IPOs is to sign up for email alerts from sites like IPO Monitor. This way, you will be among the first to know when a new IPO is announced. The Bottom Line An IPO can be an excellent way for a company to raise capital, but it also comes with some risks and drawbacks. The advantages could include a large influx of cash for the company, increased visibility, and a boost in prestige. The disadvantages could include giving up some control of the company, higher expenses, and greater scrutiny. Before going public, a company should carefully consider the pros and cons of an IPO and ensure that it is the right move for the business.What Are Initial Public Offerings (IPOs)?
How Do IPOs Work?
History of IPOs
The IPO Process
Step 1: Proposal Creation
Step 2: Underwriting Selection
Step 3: Team Assembly
Step 4: SEC Filings
Step 5: Road Show Marketing
Step 6: Pricing
Step 7: Trading
Step 8: Post-IPO
Benefits of an IPO
Access to Capital
Enhanced Visibility and Credibility
Increased Shareholder Value
Drawbacks of an IPO
Costly and Time-Consuming
Increased Regulation
Loss of Control
Volatile Stock Price
Pressure to Perform
Performance of IPOs
Lock-Up Period
Waiting Periods
Flipping
Upcoming IPOs in 2024
Skims, founded by Kim Kardashian in 2019, is an innovative fashion brand known for its inclusive and body-positive approach to shapewear, loungewear, and intimates.
The company has rapidly grown due to strategic social media marketing and celebrity endorsements, offering a diverse range of sizes and colors that appeal to a wide audience.
Skims' successful blend of comfort and style positions it as a leader in the evolving fashion industry. Its potential valuation remains a point of interest for investors in its anticipated 2024 IPO.
2. Plaid
Plaid is a prominent fintech company that provides infrastructure connecting financial applications with users' bank accounts.
Known for its role in enabling data sharing between financial institutions and fintech apps, Plaid's services have become crucial for various financial platforms. Its trustworthiness, growth metrics, and ability to navigate regulatory environments make it an intriguing IPO prospect in 2024.
3. Discord
Discord, founded in 2015, is a versatile digital communication platform offering text, voice, and video chat capabilities.
Beyond gaming, it has attracted diverse online communities, positioning itself as a comprehensive communication tool. Discord's adaptability, user privacy focus, and financial performance have generated high anticipation for its 2024 IPO.
4. Chime
Chime, established in 2013, is a fintech company that simplifies banking through a mobile-first platform, offering no-fee checking and savings accounts.
Its innovative approach to online banking, user-friendly experience, and robust growth have made it a standout in the digital finance sector. Chime's IPO is expected to draw investor attention in 2024.
5. Turo
Turo, founded in 2009, operates as a peer-to-peer car-sharing platform, disrupting traditional car rental services. By allowing private car owners to rent their vehicles, Turo offers diverse vehicle options and flexibility to renters. Its innovative approach to car sharing and market expansion make it a promising IPO candidate in 2024.
While the outlook for IPOs in 2024 remains cautious due to macroeconomic uncertainties such as rising interest rates and potential recessions, these companies are expected to shape their respective industries with their unique business models, adaptability, and potential for growth.
Each IPO presents distinct opportunities for investors looking to participate in the evolving landscape of public markets.
Initial Public Offerings (IPOs) FAQs
IPOs are not first come, first serve. Instead, they are allocated based on demand from investors.
There is no guaranteed answer, as it depends on the company and the market conditions at the time of the offering. IPOs tend to underperform in the short term but outperform over the long term.
The primary benefit of buying an IPO is that you get in on the ground floor of a company with high growth potential.
You can make money from an IPO by buying shares at the IPO price and then selling them later at a higher price. During the first public offering, investors typically purchase firm shares at a price below the market price. Then, during the public auction, the value of the business's shares may increase. If the company is already well-established worldwide, its initial public offering may generate a frenzy and price surge.
IPOs are considered high risk because the company has no track record, and its stock price can be unpredictable in the early days of trading.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
