The IPO process is an important event for a company moving toward being publicly traded. It signifies a transition from a private company to a company offering shares for the first time to the general public.
This article describes the steps in the IPO process from an initial decision to go public, underwriters, compliance filings, and the day the stock begins trading on the exchange. Understanding this process is important for those companies that are going public, and those investors who are wanting to invest in this significant financing event.
What is the Process of IPO?
The process of taking a company through an Initial Public Offering (IPO) includes several intricacies that include compliance with regulation, financial planning, and market strategic thinking. An IPO can be a significant event for any company and allows the company to take on public investments to infuse capital.
Below is a summary of the IPO process which includes the regulatory requirements, company preparations, and market aspects.
Step 1: Pre-IPO Planning and Preparation
- Company Evaluation – Before starting an IPO, a company must evaluate itself. In particular, a company must evaluate its financial strength, management team, governance and markets.
- Advisors – It is common for companies to engage a team of advisors, such as investment banks, lawyers, auditors and underwriters to provide guidance through the IPO process.
- Financial Statements – Wherever possible, the company should provide audited financial statements prepared in accordance with applicable regulations and accounting principles.
- Corporate Governance – The company should have good corporate governance in place to have credibility with potential investors.
Step 2: Regulatory Compliance
- Regulatory Approval – The authority that oversees securities markets controls IPOs and mandates comprehensive objectives such as providing and supporting a draft prospectus with key information concerning the company and its IPO.
- Due Diligence – Undertake due diligence to support the claim that all information in the prospectus is accurate and without material omissions.
Step 3: Engaging Intermediaries
- Lead Manager – Choose an investment bank or lead manager who will be responsible for the structuring of the IPO, the pricing of the shares, and managing the whole initial offering.
- Underwriters – There will also need to be underwriters who will underwrite the beauty of opportunities to all buyers of shares, if not by a request not to fulfill to all buyers if ordered not to through successful submissions.
Step 4: Valuation and Pricing
- Valuation – The company’s valuation will be calculated using various methods, including financial analysis, market comparisons, and industry benchmarks.
- Pricing – The company’s share offer price will be set based on the valuation of the company. The offer price is a critical element in attracting investors to the IPO.
Step 5: Prepare the Prospectus
- Red Herring Prospectus (RHP) – Prepare a draft of the prospectus, known as the Red Herring Prospectus, that will include all relevant information about the company, its financials and risks, and information about the IPO that will be sent to potential investors prior to the IPO roadshow.
Step 6: IPO Marketing
- Anchor Investors – You will need to attract anchor investors who usually are institutional and are willing to invest in the IPO prior to the IPO being launched. Having anchor investors is a confidence builder and will provide a benchmark for retail investors.
Step 7: The IPO Application Process
- Bidding Process – Once the conditions and final price have been established, the IPO will open for subscription, and investors will be able to bid for shares during the prescribed price range.
- Retail and Institutional Investors – Note that there are different categories of investors, such as retail and institutional, appealing to which have different subscription processes and allotment criteria.
- Allotment – Once the subscription period has ended, shares will be allotted to investors according to the bidding process and the regulations.
Step 8: Listing on the Stock Exchange
- Listing Approval – Once subscription and allotment are complete, the company applies for a listing with one or more stock exchanges.
- The Listing Date – The stock exchange grants the listing approval to the company, and trading of the company’s shares begins on that date.
Step 9: Post IPO Compliance and Reporting
- Continuous Disclosure – A company that has its shares listed on a stock exchange must continually adhere to the disclosure criteria set by the regulatory body. This includes ongoing financial disclosures, disclosure of material events, and company governance rules.
Step 10: Post IPO Performance
- Stock Market Performance – An important task is to monitor the market performance of the stock in the secondary market and conduct an investor relations program for the continued confidence (or preferably increased confidence) of shareholders.
- Utilizing IPO Funds – The IPO proceeds should be invested in the growth and expansion of the business, as described in the prospectus.
Conclusion
The IPO process is an important milestone for companies who wish to access public capital markets. It includes a great deal of planning, disclosure, and compliance with strict regulations enforced by authorities in the securities market.
Through going public, companies are able to transition from private companies to publicly traded companies that draw on the interest of a larger base of investors and promote economic growth. The success of an IPO is dependent not only on successful transaction execution, but also on the ability of the company to promote and sustain transparency, good corporate governance, and financial performance after the IPO.
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