A classic IPO involves a public offering to investors of an additional new issue of shares, which undergoes the appropriate state registration. Check the IPO preparation process and timeline below.
Process Overview of IPO Preparation Process
An IPO provides an opportunity to attract financial resources from the equity capital market and, most importantly, opens up the opportunity for a company to turn to this source again and again. To enter the stock market, a company must follow the procedural requirements for dealing in shares and special laws. The company itself, however, is not required to know all the technical details. Moreover, not a single company will be able to go through the thorns of preliminary preparation and shine as a star in the sky of the stock market on its own.
An IPO helps a company finance its growth, provides capital structure flexibility, reduces the cost of capital and debt, maximizes the company’s value, and provides liquidity to shareholders. In the event that a company already has a high level of debt load and a negligible debt service flow, it would be inappropriate for it to raise debt capital. Also, a number of companies that have placed shares claim increased opportunities to attract cheap borrowed resources.
In practice, three methods or ways of organizing the procedure for the initial public offering of shares on the stock exchange (the procedure for determining the price) are used: the fixed price method, the “portfolio formation” method (it is also called the “bid collection method”) and the auction. The fixed price method is used quite rarely and mainly in highly regulated stock markets in individual countries.
The Main Characteristics of IPO Preparation and Timeline
It should be said that the organizer of the IPO is a party chosen by the issuer to organize and coordinate the entire process of placing shares on the stock exchange. Some companies are determined with the organizer at a very early stage. Often, the placement organizer acts as a professional consultant during the preparation of the company for an IPO.
In a more detailed study, the activities of each IPO participant can be characterized as follows:
On the part of the company, the following persons are actively involved in the decision-making of the IPO and directly in the placement process itself.
- Accommodation organizers.
This group includes direct participants and regulators of the public offering. These are, first of all, exchanges, underwriters, co-managers, book runners, etc.
- The market is represented by the investment community.
The third group of participants in the IPO process should include the market itself. The extent to which the investment community will feel the need for accommodation facilities (as you know, the market develops cyclically, there are both recessions and upswings in investment activity, which is expressed in the demand for investment sources), public placement processes will develop to such an extent.
Many companies that successfully list their securities on the stock exchange have been able to show that their products or services are well received in the market, and thanks to this, the company will demonstrate high annual growth rates in the future. When investing in an IPO, the most important for an investor is the range of problems associated with an accurate assessment of the company’s prospects, market risks associated with its activities, and specific risks associated with conducting transactions during an IPO – both financial and legal.