please discuss the IPO process in the USA. Then, identify and discuss the critical events, points-in-time, for an IPO.
Through an Initial Public Offering, or IPO, a company raises capital by issuing shares of stock, or equity in a public market (Fuhrmann, 2013).There are few reasons for a private company to go public –
- Raise cash for expansion or debt reduction
- Some initial investors ( angel investor or venture funds) might want to exit
- Becoming public can generate buzz and might mean awareness of the brand or the company
- The shareholders like CEO or the founder members can see value unlocking of their holdings
Before a private company can go public it has to hire investment banks with experience in same business sector, so that they (Underwriter of the bank) can value the business. Here important point to note that businesses are usually valued based on valuation multiples of the sector, potential future earning etc,. And Investment banks usually find initial investors too.
Before a company goes public, it has to come up with a prospectus with all the company related information for Security and Exchange Commission or SEC and investors. And the company has to file S-1 with SEC. S-1 provides detailed information about the business, financial statements, potential risks and plan for the cash raised from public offering (Hall, 2015).
S-1 files can be found in SEC website https://www.sec.gov/cgi-bin/browse-edgar?company=&CIK=&type=s-1&owner=include&count=40&action=getcurrent
According to PWC, a company intending to go public (file IPO) can expect to pay 5 – 7% to underwriters. And there will be costs related to legal, accounting distribution, mailing etc. But, underwriters work on coming up with the price to make maximum profit, share allotment and finding a stock exchange to list. In US every company will try to be listed on NYSE or NASDAQ, since these markets are so liquid (Fuhrmann, 2013).
Next the CEO , CFO, investor relations individuals start roadshows essentially to convey the vision, mission and future prospect of the company to the potential investors.
After going public, each public company files 10 Q every quarter with all those information and every year these public companies file 10-K. All these information filed with SEC are for public to access, who can be investment firms or individual investors.
Any public company has to spend $1.5 million to comply with financial, legal and regulatory burdens ( Fuhrmann, 2013).
So, we can see going public is not an easy task for a company, but per The Economist IPO process is the locomotive of capitalism (Fuhrmann, 2013).