Taking a company public, IPO

Taking a company public is a time-consuming process that requires a number of steps. This process can take up to two years, or it can be completed in as little as three months. Most famous audit organizations, such as PricewaterhouseCoopers, recommend that corporations take this procedure slowly and allow at least a year for the complete process to take place before the firm officially switches from being private to being public. Slowing down the switch gives the organization and its stakeholders the time to make an educated choice about the switch. Moving from private to public has both advantages and cons. Going public provides a firm with significant benefits among them, provides the company with more funds to finance its operations, increases the publicity of a company allowing it to reach a large number of clients, whom it would not meet on its own. This advertisement gives a company a vast market share, increasing its profits (Brigham & Ehrhardt, 2016). Going public is good for the overall health of a company since the money raised during IPO can be used to motivate employees and offer incentives to the company’s founders.

Disadvantages

Going public presents a firm with various disadvantages. Going public requires a company to comply with SEC rules which are costly for a company. Once different people invest in this firm, they will be concerned with the performance of the firm, and require the company to be making consistent profits (Sun & Teo, 2016). This move might compel the firm’s management to act unethically to record ever-rising profits. This approach could make the company be focused on short-term goals, ignoring long-term goals.

The process of public offering

The first step involves a company selecting an investment bank. The firm selects this bank based on its expertise in that specified industry and its reputation in handling various matters. Prior relationship between the bank and a firm will also impact the selection process for this company. During this initial process, the company determines the total number of shares and the cost of each share (Koba, 2013. After this selection, the bank takes the task of underwriting in which it assumes legal responsibility for these shares. After underwriting, the bank becomes the owner of these shares. The above step can involve one investment bank working alone, or a combination of investment banks working together as a group. After that, the bank and the company agree on various details such as the type of securities to be issued, the amount of money expected from the IPO among other information.

The next step entails the bank filing a statement with the SEC. SEC will investigate this reports, and if all of them are okay, SEC will approve the company to proceed to the next step. During this stage, the bank submits information such as company’s background, management background and financial statement among other details (Wies & Moorman, 2015). The company also submits the ticker symbol it intends to use in the stock market. After this approval, this SEC will liaise with the company to set a date for the IPO to be offered to the public (Koba, 2013). This date should be appropriate for the company to avoid inconveniencing it. SEC then requests for cooling off period in which it ensures that the firm has disclosed all information required for this process. During this period, the bank develops the red herring document which contains information about this company. It, however, does not include the effective date and the offer price.

After creating this document, the company and the bank start the process of marketing the shares of this firm to the public. During the marketing, they use an approach that will increase the interest of the public in the company’s shares. They can engage in activities such as road shows to raise the awareness of the public about this issuance. Few days before the shares of this company are officially issued to the public, the company and the underwriter sit down and decide the price for which to offer each share (Koba, 2013). The money raised at this stage seeks to give the company money for itself. The money garnered from the secondary market goes to the individuals who have invested in the company’s shares during the initial public offer.

The importance of the secondary market

After the IPO, the company’s shares are taken to the secondary markets where those who purchased the shares at the IPO resells them to other people at a profit. The most common secondary markets for a company’s share include the Hong Kong, London and New York stock exchange. The secondary market is crucial for the long-term growth of a firm as it helps raise more money for the business and the investors. The process of taking a company public is lengthy and complicated for any person. It requires well-versed underwriters to ensure a successful transformation from being private to a public firm.<\/p>

References

Brigham, E., & Ehrhardt, M. (2016). Financial Management: Theory and practice (15th Ed.). Mason, OH: South Western, Cengage Learning.

Koba, M. (2013, December 27). Initial Public Offering: CNBC Explains. Retrieved November 14, 2017, from https://www.cnbc.com/id/47099278

Sun, L., & Teo, M. (2016). The Pitfalls of Going Public: New Evidence from Hedge Funds.

Wies, S., & Moorman, C. (2015, September). Going public: how stock market listing changes firm innovation behavior. American Marketing Association.