Understanding Initial Public Offering (IPO)
What is an initial public offer?
A company can raise funds from the primary market by selling securities to the public. It helps the company grow and expand. In doing so, a private company goes public. This is known as an Initial Public Offering or IPO.
The process of going for an IPO is extensive and detailed. It takes about 16-20 weeks for a company to go from planning an IPO to getting listed on the stock exchange. Once listed, the stock is available for trading in the secondary market.
Types of Initial Public Offerings
There are two types of Initial Public Offerings. A fixed price issue and a book building issue.
In fixed price issues, the offer price and allotment of the securities is known beforehand to investors. The demand for the securities is known after the issue closure. Payment is made during the subscription. A refund, if any, is provided after allocation.
In book-building issues, issuers offer a price band of 20%. Investors are allowed to bid within this band and the final price is determined by the issuer after the bid closure. Payment is made after allocation. The demand is known as the bidding occurs.
What happens before the IPO?
The period before the IPO is known as pre-filing. First, all key members of the IPO working committee have a meeting. Here, the timing of the issue, tasks and responsibilities are discussed.
The underwriters or investment banks that will manage the IPO, then use prospective investor interest to suggest a share price to the issuer. Due diligence of documents and company details is undertaken. Finance, accounting and operations are some of the areas under this ambit. Legal documentation of the underwriting agreement, lock-up agreements, legal opinions, and press releases about the price, and date of issue are completed. Then the venue of listing, such as the New York Stock Exchange NYSE or another exchange is fixed.
In addition to these, valuation updates, continued due diligence, equity research analyst briefings, internal approvals from underwriters, and submission of documents to the U.S. Securities and Exchange Commission (SEC) occur.
Then the filings are done with the SEC.
During the wait time, when the SEC reviews and evaluates the filings the underwriters continue to work on the roadshow presentation and marketing strategy. This could also include talks with investor groups to better understand their criteria for investing.