When a company decides to raise funds in the stock market by offering shares to investors for the first time, it is known as an initial public offering (IPO). The listing process has numerous steps and requires a team of specialists including investment banks to manage the sale of the shares and law firms to ensure regulatory compliance. It also involves a company having to create and follow processes to report auditable financial and accounting information regularly to regulators.
An investment bank is needed to carry out due diligence on a company and help it put together a prospectus, which must be approved by the regulator of the stock exchange where it plans to list, for example, the Securities and Exchange Commission in the United States or the FCA in the UK. If the prospectus is approved, a business then has to file the application with the relevant stock exchange and it can either be accepted or rejected – sometimes with conditions attached.
Once the application is made and accepted, an underwriter is appointed to oversee the offering. The underwriter helps the company decide how many shares will be sold and at what price. In order to determine demand, the underwriters often conduct pre-marketing to build interest in the offering. This can include preparing press releases, holding meetings with investors and creating investor presentations to share details about the company. The underwriters may revise their analysis throughout the marketing process to help them determine a fair price for the shares.
The price of the shares is set through a valuation of the company using several techniques, such as discounted cash flow, enterprise value, comparable firm adjustments and more. The underwriters take into account demand but they will also want to offer the shares at a price that is attractive to investors in order to make sure the offering is successful.
During the offering period, which is typically a three-week period from the date of filing to when the SEC staff declares the registration statement effective, the underwriters will sell the company’s shares to investors. Investors can buy the shares in either paper form or via a depository account such as the NASDAQ or New York Stock Exchange.
Following the IPO, a publicly listed company has access to greater funding opportunities and can use its shares to raise money in a variety of ways. It can use its shares to finance acquisitions, for instance. It can also take on debt at more favourable terms. It is able to do this because it can issue additional shares to the market without diluting existing shareholders. This gives the company more flexibility as it grows and expands. The increased visibility and credibility of a listed company can help it attract top talent as well. It can also boost productivity by allowing employees to purchase and sell shares on their own, which makes it easier for them to take part in the company’s growth. initial public offering services