What Is Involved in the IPO Process?

The IPO process occurs when a private company wishes to become public in order to raise the necessary capital to fund its operations. An IPO, or initial public offering, is a registered filing that establishes the sale of company stock. It involves selecting an investment firm and partnering with an underwriter to determine a stock price, secure potential investors, and disclose official company financial documents.

The first step in the IPO process for many firms is to locate an investment company that is willing to underwrite its stock. An underwriter will usually obtain a letter of intent from the company that wishes to become public. This letter protects the investment company and the underwriter in the event that the firm changes its mind or is unable to get its registration approved by a government agency. An underwriter will usually incur a set of initial expenses and the agreement will typically offer him reimbursement for those expenses.

Letters of intent spell out the agreement between the company and the underwriter. The company will usually agree to be honest, accurate, and cooperative in disclosing all requested financial information during the IPO process. An underwriter and his investment firm will agree to act as swiftly and diligently as possible in completing the registration, and selling and distributing the firm's shares. Underwriting fees and discounts are also usually detailed in a letter of intent.

Once a company has secured an investment firm, the next step in the IPO process involves preparing the necessary financial documents and disclosure needed to file an official registration. Government agencies will usually have very specific filing criteria and supporting information that needs to be included in order for the registration to go through. Prospective investors need to be adequately informed about the financial performance of the firm, including information regarding its assets, liabilities, cash flow from operations, and risk factors.

After an official registration has been filed with a government agency, the agency makes an announcement that the registration is effective. The agency then may continue to work with the underwriter to gain supplemental information and make necessary corrections in order for the registration to be approved. After approval, the next step in the IPO process involves marketing the stock through sales pitches, presentations and canvassing. Most of these sales presentations and pitches are made to large sized investors, such as financial institutions and corporations.

Potential investors will usually indicate whether they are interested in purchasing the IPO and how many shares they think they would be able to commit to. This commitment may include buying additional shares once the stock is past the IPO stage. The underwriter then determines a market price for the IPO offering, the number of initial shares to be offered, and a date that open trading will begin. Details concerning the number of initial investors, price discounts, and market price are filed as an amendment to the original registration.

After open trade is established, it takes approximately three days for the IPO exchange to close. The stock is delivered and the company receives the net revenue from its sale. An underwriter monitors the stock's price for a few months afterwards and exercises the right to purchase or sell shares to stabilize it.