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When a company issues stock, this is part of a complicated process. Major stock exchanges, such as the New York Stock Exchange and Nasdaq, have high standards and requirements in place to make sure that the best offerings make the cut.
The process of listing shares on a stock exchange is called an initial public offering, or an IPO.
IPOs allow companies to list a part of their outstanding shares on an exchange, which comes with a one-off capital inflow, as well as continuous liquidity and publicity.
However, while going public does have its advantages, it also comes with added responsibilities for the management of the company.
Whether a company is part of the S&P 500, or a micro-cap stock, financial regulations oblige companies to release financial statements to the public and increase the overall transparency of their operations.
IPOs are important events in the lifecycle of a company and there are a few different methods of floating shares on an exchange.
The Initial Public Offering (IPO) process is a complex and regulated procedure through which a private company becomes publicly traded by offering its shares to the general investing public for the first time.
The IPO is a multi-layered process that is done through a lot of regulatory scrutiny. Thorough due-diligence is essential to make sure that investors have access to the relevant information regarding the company going public.
The preparation stage is one of the most important steps in the IPO process, which largely determines the success and regulatory compliance of the offering.
Some key preparation steps companies take prior to an IPO include:
As a second step, companies need to formally file with the Securities and Exchange Commission:
After the SEC clearance, the company embarks on a roadshow, where it presents its business to potential investors, including institutional investors, analysts, and fund managers.
The culmination of the IPO is listing on a stock exchange, but the regulatory steps do not stop here:
A direct IPO is not the only method for companies to go public and list their shares on an exchange.
A special purpose acquisition company, or SPAC, is a legal entity that serves as a blank check company that is listed on an exchange and seeks to merge with a private start-up to give it a cash injection and take it public.
In a SPAC IPO, investors purchase shares in the SPAC, which then holds the funds in trust while seeking a suitable target.
Once a merger is identified and approved, the private company effectively becomes publicly traded without going through the traditional IPO process.
SPACs offer a faster and potentially less costly route to becoming a public company.
However, it must be noted that most SPACs entering the market tend to fall much lower in price compared to their entry price of roughly $10 per share.
An Initial Public Offering (IPO) is when a private company goes public. It involves selecting underwriters, conducting due diligence, and preparing financial statements. The company files with regulators, conducts a roadshow to attract investors, sets the offering price, and lists shares on a stock exchange.
Yes, companies typically receive money from an IPO. In an IPO, the company issues new shares to the public and receives the proceeds from the sale of those shares, which can be used for various purposes, including business expansion and debt reduction.
After an IPO, a company becomes publicly traded. It must adhere to ongoing regulatory requirements, including regular financial reporting and corporate governance practices. It can access capital markets for funding and faces increased transparency and accountability to shareholders and the public.