Initial Public Offering (IPO)
Initial Public Offerings
Every public company in the world started somewhere: whether it was in a garage like Apple or a basement like Amazon, every company started as private. In order for the company to grow into the size it is today, a major step in the process is going public. This involves offering shares/equity/part ownership to the public in exchange for funds. The process of issuing shares to the public in exchange for funding is done through an Initial Public Offering (IPO). Companies must follow regulations set forth by the Securities and Exchange Commission (SEC) as once a company goes public, its walls and information become transparent. Prior to an IPO, an investment bank is hired to gauge demand for the company’s shares and decide on its listing price. An IPO is especially important for its founding members and investors as it can be an exit strategy to gain profit from their initial investment.
However, before a company goes public, it must assess whether it is mature enough to handle SEC regulations and the responsibility to public shareholders. Any private company with strong fundamentals and profitability potential can qualify for an IPO as long as it’s ready to cover the cost, risk and financial disclosures. The largest IPO in the world belongs to Alibaba, which went public in 2014 and was valued at $21 BILLION.
Benefits and Drawbacks of IPOs
An IPO’s primary benefit to any company is the amount of funds generated from the sale of shares to the public. Additionally, an IPO increases the company’s exposure publicly, which can help drive revenue. Lastly, the required transparency for an IPO, allows companies to gain a favorable image and improve their credit ratings.
However, this can also be a drawback. With the extra transparency, time and effort must be put in to disclose all necessary information. This can cause issues if the disclosed information is false in any way. Additionally, the price of the company’s shares are constantly on everyone’s mind (since they get compensated with stock options) and this can distract employees from achieving real results. Lastly, the benefit from going public must outweigh the costs, as the costs of going public are high.
SPAC: Another way for a company to go public is through a Special Purpose Acquisition Company. Such a company has no commercial operations, it’s only responsibility is to raise capital through an IPO with the purpose of acquiring a private company. These companies are also known as blank check companies. For example, Holicity, a blank check company, had agreed to take Astra Space public through a SPAC deal. This way, Holicity went public, raising money from public investors, and then reverse-merged into Astra Space, contributing all that money to Astra. As a result, Astra became Holicity in the stock market. SPACs usually have 2 years to complete their acquisition or else money will be returned to investors.
*Disclaimer: the author of this article owns shares of Astra Space