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The Stock IPO Process Explained

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Why Companies Undergo The Stock IPO Process

IPO ProcessThe Initial Public Offering (IPO) process, IPO process for short, is not well understood by many people in the general investing public.  Many view the IPO process as confusing and frustrating, since the IPO process is very fluid and affected by many different market forces.  Individual investors that do not have Wall Street inside connections often feel shut out by the IPO process, since IPO shares are usually sold to well connected investors with large accounts.

Before delving into the IPO process, it is useful to explain why companies sell shares to the investing public via an IPO.  Companies can raise money in a number of ways, such as selling shares in a private placement to private accredited investors or by selling bonds that are paid off from company revenue.  After being in business for a number of years, some companies have developed a strong enough business model to try to sell a portion of their shares to the general investing public via an IPO to raise money for a variety of company needs, from paying down debts to business expansion.  Not all IPO attempts are successful, since changes overall market conditions and the financial condition of a company trying to complete an IPO can cause an IPO effort to fail.

Unraveling The Mystery Surrounding The Stock IPO Process

The IPO process begins when a company talks to investment banks, such as Goldman Sachs or JP Morgan, to sign an IPO underwriting agreement, whereby the investment bank agrees to commit money to see the IPO to fruition in exchange for a fee that is based on the total amount of the IPO.  From that point on, the investment bank(s) is known as the lead underwriter during the IPO process and acts as the agent for the company to raise awareness of an IPO on Wall Street and help the company get through the regulatory hurdles associated with an IPO.  Other investment banks may also get involved in an IPO as co-underwriters.

An IPO can sit in limbo for a number of months or even years, as a company tries to overcome the regulatory hurdles associated with the IPO process and waits for a stock market that will be receptive to their IPO.  When a company is ready to go ahead with an IPO, they submit a S-1 Filing (also known as an IPO Prospectus) with the United States Securities and Exchange Commission (SEC) that registers the IPO shares with the SEC and explains what the financial aspects of the IPO to investors.  The S-1 Filing can be updated and amended numerous times before an IPO occurs, and must ultimately be approved by the SEC before an IPO can proceed.

The final stage of the IPO process is when a company goes on a “road show” to explain their business model to the investing public and drum up support for their IPO.  Soon thereafter, if there is sufficient public interest in the IPO, investment banks that are the IPO underwriters set an initial price range for the IPO and gauge investor interest in the IPO.  If investor interest wanes or market conditions change for the worse, an IPO may be delayed or cancelled.  If investor interest is sufficient, the IPO will price at a price within the price range and shares will be sold to investors who expressed interest in buying IPO shares, thus completing the IPO process.  If an IPO has strong investor interest, the price range and final IPO price may be raised from the initial IPO range.


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