IPO, Explained

IPO: Introduction

Now there are many new words and concepts that are arising in the blockchain and cryptocurrency spheres. Some of them are popular like ICOs, some of them are going to be very popular like IEOs. Today we want to introduce you one of the new concepts of the sphere. This concept is the Initial Public Offering (IPO) and we are going to explain what is it and how it works by details.

The process when the shares of the private organization are suggested to the public one is called IPO. Starting firms can launch IPO to gain the funds they need for growth, and prosperous organisations can use IPOs for letting owners sell all their shares or a part of them. The organisation that decides to launch an IPO brings an investment bank or underwriting firm for determining the number of shares, the suitable method of security, time interval for the market offering, etc. 

Private organisations can have several owners (for example, a private family corporation can have 4 owners that are members of one family), but they are not allowed to sell their shares, contrarily, public corporations have to sell some of their shares to the public just to have the right of calling themselves public. IPOs are also described as “going public” because they give an opportunity to private organisations to market their shares and become open.

Private organisations have their own advantages that are lost as soon as they launch an IPO. The main advantage of a private firm is that it doesn’t have to share much information about its finances. In many countries, like the USA, it's much more inexpensive to open a private business than public, that’s why most of the small and middle businesses prefer being private. But it’s not a rule, there are many huge organisations and corporations that are private too, like, Hallmark Cards and IKEA.

Public businesses can have thousands of shareholders, the laws for this kind of organisation are strict. They must give information about their finances every quarter and they have to create a board of directors. Besides, public organisations have to follow the directions of the stock exchanges where the shares of their firm are listed. Originally it was very hard for a private business to go public, the laws and regulations were very strict, but as the competition has raised, it became a little bit easy to start an IPO.

History of Initial Public Offering

The very first organisation that launched an IPO is supposed to be the Dutch East India Company. The organisation paid 12-63% annual returns to its shareholders. Nowadays IPOs became a very popular tool among businesspeople, who want to collect funds for their business’ future growth. 

Reasons to go public

Reading all the information above you can ask yourself a question, if it’s hard and if there are many difficulties that public organisations have, then why should I launch an IPO and go public? The main reason is resources, of course. Sure, you can say that private business can find a private investor or borrow from some other organisation or something, but IPOs are giving large sums of money for the corporation and they are not to compare with one private investor or something. 

Here are some huge corporations that raised large sums by launching an IPO:

There are also other financial privileges for public organisations. As scrutiny from investors and analysts increases, public businesses can have better interest rates when they are declaring debt. The second thing is that the public organisation can increase its stock in secondary offering as long as the market is interested in the organisation. So, it becomes easier to manage acquisitions and mergers, because the stock counts as a part of an arrangement.

For those who want to invest, open markets mean liquidity. If you own a share of a private firm it means that it’s very hard to sell you share plus it’s hard to determine a price to your share. Public companies are selling and buying on the stock market, where the value is known and transaction data is known. 

Liquidity and public markets also give a chance of implementing employee stock ownership plans (ESOPs), this eases attracting talented workers.

Also, IPOs are very profitable for investors. After launching an IPO, shares of the company can astonishingly raise, and those investors who have a lot of shares can become rich just in few minutes.

How does it work?

When an organisation launches an IPO, there are numerous processes that happen. Chosen investment bank or underwriting firm have to do these:

Form an external IPO team. This team must include lawyers, underwriters, SEC (Security and Exchange Commission) specialists and certified public auditors.

Compile all the information about the organisation. This must include supposed future steps and financial performance.

Audition of the financial statements and generation of a conclusion.

The firm files its prospectus (a special document that is required by SEC and gives information about an investment offering for public sale) and extra necessary forms with the SEC and sets a date for the IPO's beginning.

Is your company ready to go public?

Every decision doesn’t come easily to us, especially if we are the head of a organization and the future of this business depends on us. There are some tips that can tell you “It’s time to launch an IPO”. Here they are:

Your corporation is ready to be checked.

Your capital expectations are down-to-earth.

Of course, no one can exactly say what future will bring us, but if you’re 80% sure that your future financial performance is true, then it’s time for an IPO.

You have a skilfull team that can maintain future processes.

Your company has a strategy of growth.

The story of success

There are a lot of well-known corporations that went public, like Google, Facebook, Snapchat, etc. But this part is dedicated to one of the most successful IPOs in history. 

Before September 2014 The Alibaba Group was an unknown Chinese company, but that time everything has changed. That time it started an IPO and quickly raised $25 billion. This made the organisation not only a successful one but also brought unbelievable popularity. On the first day of trading on NYSE (New-York Stock Exchange), the company’s stock increased by 38%, and its market capitalization reached $238 billion. Alibaba’s share price has doubled in 2017 and it became the first Asian firm that reached a $400 billion market capitalization. Nowadays the market cap of the organisation equals $461 billion.