An IPO helps a private firm to go public by issuing its shares. This is through a process that has not been done previously in the financial market by the firm. An IPO permits the firm to get the capital required from the public investors. The transfer from a private to a public firm is crucial for private investors to completely get the profits from their respective investments. This is because it usually also has a share premium for the present private investors. Also, it helps the public investors to get some share in the offering. Let us find out more about what is an IPO in this article.

What is an IPO's Function?

Before any IPO is issued, the firm is seen to be private. As a firm that has not yet issued an IPO, the organization has to grow to a small number of shareholders and investors such as angel investors, venture capitalists, friends, family, and founders. Any IPO is a vital step for a firm as it gives the firm a lot of access to getting the capital they want. This gives the firm a greater capability to expand significantly. The credibility to get its shares listed and the increased transparency are also major factors that help the firm get better terms when taking borrowed capital. A firm has to reach a stage in the process of growth where it sees that it has become mature enough to cope with all the regulations put in place by the Securities and Exchange Commission. It must also be aware of its responsibilities and benefits towards the public shareholders.

Then, it can start to show its interest in going public and raising capital from the financial markets. Usually, this type of growth happens when a firm has reached a very high valuation. This is known as going to the status of a unicorn. But private firms at several different valuations, proven profitability, and robust fundamentals can also get the qualifications required for an IPO. It depends on the competition in the market and its capability to meet all the listing requirements. The IPO shares are priced after going through the required due diligence. When any firm goes public, the previously owned private shares also get converted to public ownership. The existing shares of the private shareholders are worth the price of the shares that are trading publicly. The underwriting of the shares also has some special provisions for the conversion of ownership from private to public.

Also, the public market gives a great chance for a large number of investors to purchase the shares in the firm and give capital to the shareholder equity of the firm. The public is any person or institutional investor who wants to invest in the firm. Usually, the number of shares sold by the firm and the cost for which the shares sell are the main factors for the equity value of the new shareholders of the firm. The equity of the shareholders still shows the number of shares owned by investors when it is both public and private. But when an IPO is issued, the equity of the shareholders grows by a large margin. This is because of the amount of cash invested during the primary issuance.

What is an IPO's Process?

An IPO usually consists of a couple of portions. This includes the pre-marketing phase of the IPO. The following step is the offering of the IPO. When a firm is interested in issuing an IPO, it will advertise to the underwriters by taking private bids or making a public statement to increase the general public's interest. The underwriters are the people who take charge of the overall process of the issuance of the IPO and are selected by the issuing firm. A firm may select several underwriters to manage the various portions of the IPO process together. The underwriters are present in all aspects of the issuance. This includes doing the due diligence, preparing the documents, filing, marketing, and finally, issuance.

Proposals are the first step in the whole process. Underwriters give valuations, the amount of the shares, and the usual time frame for the offering that will be given in the financial markets. Then, the firm selects the underwriters and agrees to the terms of the underwriting through an underwriting agreement. After that, the teams for the IPO are formed. This includes the Securities and Exchange Commission experts, certified public accountants, lawyers, and underwriters. Following that, documentation is done. The info about the firm is compiled with the necessary documentation of the IPO. The S-1 Registration Statement is the main filing document required for an IPO. It has a couple of parts, including the privately held filing data and the prospectus. The form includes the preliminary data regarding the predicted date of the filing. It is also revised often through the whole pre-IPO process. The prospectus is also kept under constant revision.

Next, marketing updates are developed for the pre-marketing of the issuance of the IPO. The executives and the underwriters market the issuance of the share to find out the demand and give a final offering price. The underwriters will also be able to make the required revisions to their financial analysis using the process of marketing. This also includes modifying the cost of the IPO or the issuance date as deemed necessary. Firms take the steps required to meet the everyday needs of the public share offering. The firms must stick to both the needs of the SEC and the exchange listing for the public firms. Following that, the firm should form a board of directors and ensure that there are processes in place for reporting the accounting and financial data each quarter. Finally, the firm issues the shares on the date of the IPO. The capital from the primary issuance given to the shareholders is taken as cash and recorded as the shareholders' equity on the firm's balance sheet.

After that, the share value written on the balance sheet becomes dependent on the equity per share valuation of the shareholders of the firm. There may be some post-IPO provisions also. The underwriters may have a certain time frame to get the additional number of shares after the date of the IPO. There will be some investors who will be subject to quiet periods.

What are an IPO's Pros and Cons?

The main aim of any IPO is to get the required capital for a firm. It can also come with several pros and cons. One of the main pros is that the firm gets access to investment from the general public in the financial markets. This helps in better acquisition deals and grows the firm's public image, prestige, and exposure, assisting the firm's profits and sales. The transparency is also increased as there is mandatory quarterly financial reporting. This can lead the firm to have better credit borrowing terms than any private firm.

There are a few cons of going public for any firm, which may make many opt for different methods. One of the main cons is that the process of the IPO is costly. The cost of maintaining a public firm is a continuing thing and unrelated to the other costs of running a firm. Also, the fluctuations in the price of the share of a firm can be a big distraction for the management. They may be evaluated and compensated based on the performance of the shares rather than any concrete financial results.

Conclusion

IPOs get a lot of attention from the general media. A lot of it is boosted by the firm that wants to go public. But IPOs are quite popular because they give volatile movements in prices on the day of the IPO and sometime after that. They can also give huge profits sometimes, but there can be big losses also. The investors should judge all the IPOs using the prospectus of the firm that wants to go public. They should also take a look at their risk tolerance and financial circumstances. We hope this article solves the query of what is an IPO that is present in the minds of many common investors.