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A Guide To Every Step In The IPO Process
16 Nov 2021
IPO or Initial Public Offering is generally the process of taking a company public. With an IPO, a private company offers its shares to public investors. But what is the actual process of going public? There are many questions that pop up in our minds when we talk about IPO. From what is the IPO process to how does an IPO works, every question creates confusion among beginners.
Generally, it is the process of going public for new investments for a private company. But there are many other processes included in the IPO timeline. Here we will talk about all these steps. Whether you are a beginner-level investor or you are looking for new investments for your private company, IPO is a must-to-know thing for you. You need to know all the IPO process steps. This post is a complete guide for the IPO process. From becoming familiar with the IPO process to filing for IPO, everything will be covered.
What Is An IPO?
The very first question that comes to mind is what is an IPO. Basically, we say that the IPO stands for Initial Public Offering. Before an IPO a company is private and not open for direct public investments. In other words, we can say that before an IPO, a company is not listed on any stock exchange. The only investors a private company has are angel investors, board members, family relations, etc. But with the IPO, the company became open for public investments.
The meaning of IPO is always the same for everyone, but the purpose can be different. As a private company, an IPO is an event when your company goes public. After that, your private company becomes public and will be listed on the stock exchange. Before it gets listed on any stock exchange, the initial shares are sold in an IPO. That is why it is known as Initial Public Offering (IPO). So basically, for companies, an IPO is the process and event to get public funding or investments.
For an investor, an IPO is an investment opportunity that gives him/her a chance to invest in the initial shares, securities, bonds of a private company that is just a few steps away from going public.
What Is An IPO Process?
The Initial Public Offering process is a long and confusing process, there are many steps involved. It is the preparation of going public before an IPO by a private company. There are much legal documentation, regulatory permissions, underwritings, etc. All these processes can confuse anyone. But here we will explain all the steps to help you know how do IPOs work.
The process is completely different when a private company is filing for IPO as compared to getting angel investments. To get angel investments, companies need to pitch the investors. But the case is different here with an IPO filing process. Here the private company has to find an investment bank as an underwriter. After that, different types of agreements and engagement letters are written for legal proceedings. Everything is explained clearly in the below-mentioned sections of this post.
Why Do Companies Decide To Go Through The Process of IPO?
There are several reasons behind going public. But the major and most common reason is getting new investments and raising funds. This is one of the most common reasons why companies decide to go through the process of IPO. Along with raising funds, there are many more reasons that push a company owner towards taking a company public. Before you know how to go public with the exact process of going public, you need to know the actual reason. Following are some of the common reasons why companies go public with investment IPO.
● Raising Funds:
As we have mentioned, one of the most common reasons behind going public is to raise funds for the company. All the private companies run with the help of the owner or co-founder’s savings. After that, these companies earn good capital with profits. That is all that they have, and sometimes they do have angel investors. But to raise a huge amount of funds, an Initial public offering is the best option. Here you will get investments in your company from retail investors.
● Company Image:
Company image or reputation is very important for success. No matter if you want to attract customers or new investors for your company, the reputation, brand value and authenticity you have, is always one of the important factors. So when you go public from a private company, your company gets a brand reputation built among customers and investors too.
● Safe Funding:
There are many other ways to get funding for your company. The companies can directly approach new angel investors. Also, there are chances that big enterprises will invest in private companies. Bank loans are also a good option. But when it comes to safe funding, the IPO or public listing is always the best option. There are no risks involved and no high debt interests are there to pay for a company.
● More Control:
Are you losing control over the management decisions of your company due to many angel investors? Then public funding can save you from this. Before you know what is the IPO process, you need to know what is the major benefit of an IPO. The major benefit is that you never lose control, even if you are getting a huge amount of funding through crowdfunding. Because there will be small and retail investors that will add a huge amount to your company capital through their small investments. So there will be more investments and fewer decision-makers.
● Transparency:
Transparency is always important when running a business. You must have to be transparent in front of the regulatory authorities, investors, public and customers. Does your private company have a transparent system in terms of funding, investments, revenue and capital? Being a public company, there will be more transparency, which will positively impact the overall reputation of the company.
● Financial Stability:
Financial stability is what all companies are looking for. No matter how much revenue a company is generating through its channels, if there is no financial stability, there will be no more growth. To win the confidence and trust of the investors and customers, your company needs to be a financially stable organization. Crowdfunding or stock exchange listing gives financial stability to your company. That is why an investment IPO is an important thing to consider.
● Liquidity:
Liquidity is also the major factor that you need to consider while filing for an IPO. It is important to know how to make your company public, but also it is important to know how initial public offering stocks can help you get the liquidity in your funds. Getting capital gained from crowdfunding will allow you to utilize the funds in any way to grow the company.
How Long Does It Take To Complete The IPO Process?
IPO process steps can take time to complete. But the question is how much time does it take to complete the whole process? The time taken is never the same for all the companies. It depends upon the size of the company and the way they choose to go public. There are different options available in the different stages of IPO. So all these options will decide the exact time that will be taken to complete the IPO process.
Usually, the minimum time that will be required will be six months. There will be a minimum of six months time that will take to complete the IPO process. But when it comes to maximum time then it can be from 9 months to a year. So on average from six months to a year is required to complete the whole process of going public. IPO timeline contains many complex steps so that it takes almost a year to go public and get successfully listed on the stock exchange.
What Do Companies Do Before An IPO?
Beginners may ask how does a company go public. There are many other questions asked related to IPO documents and IPO investments. To start the IPO procedure companies have to fulfil all the IPO requirements. After completing all the requirements, the process to file for an IPO will start.
There are basically many tasks performed by a company while it is preparing to go live. Before we talk about all the procedures and steps involved, we will talk about some of the major changes that a company makes in-house. There are many things that change when a company decides to go live.
Firstly, the senior management and executive-level officers get replaced and new hirings are carried. The management has completely changed. Sometimes a few companies also change the policies of the company. These are the policies that directly or indirectly impact the investors, public funding, revenue model and company reputation. However, these steps are not necessary to perform for any company. But still, almost every company changes a few things in their organizational structure, policies, etc.
What Are the Specific Steps that A Company Takes in The IPO Process?
Now let’s get to the point, what is the IPO process? There are many steps involved that can confuse anyone who is not familiar with the complete process of going public. That is why we have clearly mentioned all the IPO process steps. These steps are performed by all the companies that want to go public necessarily. There are no ways to skip these steps as they are related to legal documentation, policies, etc.
Step 1: Select an Investment Bank/underwriters:
Underwriting services are required while a company is filing for an IPO. Underwriters are also known as investment banks. A company that wants to go public, needs to find an investment bank for it. That investment bank will help the company in the underwriting process. There are many aspects that a company considers while choosing an investment bank as underwriters for the IPO process.
Step 2: IPO Due Diligence and regulatory filings:
The investment bank chosen by the issuing company is like a middle man between the IPO investors and the company. The investment bank will take care of all the underwriting on the behalf of the issuing company. There will be many things involved and the nature or mode of investment is chosen according to different agreements. These agreements will decide how an investment bank will work along with the company. It will decide whether the bank will be a broker or just an underwriter. Following are some important regulator filings and due diligence.
● Firm Commitment:
This is the first type of agreement or arrangement between the investment bank and the issuing company. In this type of agreement, the investment bank acts as a responsible authority providing the guarantee of a particular amount of funds to be raised. The investment bank will buy the initial public offering stocks from the company and will sell them to the investors and assure the company that it will raise a particular amount of funds for the company.
● Best Efforts Agreement:
Here in this type of agreement the investment bank just acts as an underwriter and does not guarantee any particular amount for fundraising. The company is solely responsible for the funds raised according to this agreement. Here the company just acts like a broker and sells the shares to the IPO investors on the behalf of the issuing company.
● Syndicate of Underwriters:
Sometimes investment banks are not sure about the safety of an IPO. In such cases, a bank never wants to take the whole responsibility and the risk of an IPO. So there will be multiple banks involved in an IPO with the help of a syndicate of underwriters. However, there will be a lead investment bank in this process of going public. And a strategic agreement is made between all the banks and they sell allocated securities, bonds and stocks to the investors.
● Engagement Letter:
An engagement letter is also an important letter in the list of IPO documents. The engagement letter clearly mentions the gross spread and the reimbursement cost terms between the investment bank and the issuing company. The engagement letter ensures that all the costs borne by the investment bank will be reimbursed. Also, it decides the gross spread, which is the margin between the buying price and the selling price of a stock for the bank.
● Letter of Intent:
A letter of intent is basically an agreement that makes it possible for both parties (issuing company and investment bank or underwriter) to commit to supporting each other. The bank commits that it will enter the underwriting process of the IPO of the company. From the company's side, the commitment is to provide all the required information to the underwriter. The over-allotment option is also described in the letter of intent of an IPO.
● Red Herring Document:
The Red Herring document can be described as a marketing prospectus that clearly mentions the status of the company and the offering share price for the investors or buyers. This prospectus is used as marketing material in roadshows.
● Underwriting Agreement:
After the letter of intent, it comes to the situation where the offering price is decided in the legal proceedings or documentations. The underwriting agreement helps here. The underwriting agreement will decide and bind the underwriter to buy the shares at the described offer price.
● Registration Statement:
The registration statement is a kind of document that helps the investors to decide whether the issuing company is financially stable or not. Also, the behavior and status of the management are also described in this statement. The financial statements, status, progress and forecasting is involved here. The registration statement is divided into two parts, the first one is the prospectus that is for the investors and the private filings have the information that is provided to the SEC or any other regulatory authority.
Step 3: The IPO Roadshow:
The IPO roadshow is similar to any other general roadshow. But here the issuing company and the investment bank or underwriter shows their financial status, offer price and all the things important to know for a new investor. The roadshow is not basically a roadshow, but it is a collective meeting, seminars, webinars, conferences, etc. These events are known as the IPO roadshow. The presentations are given in front of the investors, retail buyers, institutions, etc. to attract them towards the upcoming IPO.
Step 4: IPO Pricing:
After getting the approval of the IPO from the regulatory authority such as the SEC, the company and the investment bank will decide upon the offer price of the share units. Also, the issuing company and the bank decide the number of units or shares to be sold in the upcoming date. All of these prices are decided on an effective date.
Step 5: Going Public:
After everything is decided and approved by the regulatory authorities, the IPO will go public on a specific date. The investors will buy the shares from the investment bank for the specified issuing company.
Step 6: IPO Stabilization:
The stabilization is carried after the shares are publicly sold in the market. The investment bank or the underwriter will purchase the shares to stabilize the whole market for the stock.
Step 7: Transition to Market Competition:
Now the final step is to transition the stock to the market competition from the IPO. This process starts almost 25 days after the completion of the process of going public.
When Does A Company Go Public?
In the USA the Securities And Exchange Commission has set the eligibility in two parts for the companies. The first one comes under the “Emerging Growth Companies”. A company can apply for IPO under this section if it has an annual gross revenue of less than $1.07 billion. The second eligibility criteria are “Smaller Reporting Companies”. A company comes under this criteria if it has a public float of less than $250 million or annual gross revenue of less than $100 million.
After getting eligible under the different clauses and sections decided by the SEC, the companies can go public anytime when they feel it is the right time to raise funds.
What Are The Pros And Cons Of Taking Your Business Public?
If we count on pros, then the list is way longer than the cons. But still, there are some significant cons of the Initial public offerings. Following are some of the common cons and pros of Initial public offerings.
Pros:
● Safety is an important thing and fundraising through IPO is the safest mode as compared to bank loans.
● The reputation of the company becomes more positive and stronger in the market.
● Crowdfunding can help you get more funds along with losing less control over your company.
● It brings transparency to your company’s revenue model, investments, capital and policies.
Cons:
● The cost of taking a company public is very high.
● There are many steps involved that can make a beginner confused while filing for an IPO.
● It usually takes a long time to get your IPO approved by the SEC.
What Parties Participate in the IPO Process?
Firstly, the issuing company is the major party in the IPO process. After that, the investment bank or underwriter is involved. The regulatory authorities such as SEC in the USA and SEBI in India, are involved. Along with this if we talk about the investors then there are both kinds of investors involved in the IPO process. Institutional investors are also interested in IPOs as well as the retail investors putting their money in such investment opportunities.
Metrics for Judging a Successful IPO process:
Several factors or metrics are used and analyzed by the investors to evaluate the success rate of the IPO process of a company going public. The major two factors are mentioned below.
Market Capitalization:
Firstly, market capitalization is important to consider. It usually takes a month after the IPO when you can easily evaluate the company value with the help of market capitalization. You just need to keep an eye on the market capitalization of the issuing company along with its competitors in the market. Market capitalization will help you know whether a company is conducting a successful IPO for the investors or not.
Market Pricing:
Here again, market capitalization is the important metric to consider. The difference between the initial offer price and market price after 30 days of IPO is very significant. If it is less than 20%, then the IPO can be considered a good and successful investment opportunity. Otherwise, if it is more than 20% then it is not considered a successful IPO.
Conclusion:
IPO or Initial Public Offering helps the private companies go public and get more fundings with the help of crowdfunding. Before being a public company, the private companies had angel investors, personal funding, bank loans, and many other sources of funding. But the safest mode of getting funds in a big amount is to get your private company to go public.
Being public means that your company will be listed on the stock exchange. To do that the company has to know how to file an IPO. After that, the company will file the IPO with the help of an investment bank or underwriters. After that, all the IPO steps are performed and then the company gets approval from the SEC. Before the IPO, the IPO roadshows are conducted to attract new investors. After that, the retail investors and the institutional investors take part in the IPO and buy stocks of that company at the offer price.