The first sale of the Company’s stock to the public is how an Initial Public Offer IPO is termed, and the most important thing to remember that the company starts its journey as a private company, and with the issue of IPO it goes public and offers the shares to the general public and becomes a public company. The process, the understanding the entire way the IPO works out is very valuable for the company in its future fundraising endeavors.
Difference between a Private and Public Company
Once we understand the difference between the private and public company it will be a lot simpler to get in depth of the IPO’s who and Why.
- the public company are usually listed in the stock exchanges and traded openly in the exchanges, while a private company the shares may not be listed in the stock exchange as it a company founded by a group of individuals with no shares being traded or money raised from the public.
- in order to go public, the private company must comply with the regulations and approvals to sell in their shares in the stock exchange, the first offer to the public in form of shares is the IPO
- once the IPO is fully subscribed the company becomes a public company and its shares are traded in the stock exchanges
- Private companies are closely held and have only a handful of shareholders, and have lesser reporting requirements than a public company which has to keep filing their operation and financial health status in the reporting metrics to the stock exchanges.
- One advantage of going public is that it is easier to look for funding for the business as they comply with all the rules and regulations and banks have all their audited financials for their assessments.
Process of IPO
- Once a private company intends to go public it would first require the underwriters to underwrite their shares and most of the investment banks offer this service for a percentage of commission, for committing to sell a percentage of stock in lieu of a fees
- The application is filed with the market regulator stating the details of the intention to launch the IPO and prepare for a release of the red herring prospectus with details about the company, the revenue, business, and the profits for the previous years for the brief understanding about the management and its shareholders.
- Sometime after the release of the red herring prospectus, the final IPO is released to the public to subscribe to the share in the company.