• May 2019
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Initial Public Offering (IPO)

  1. A private company’s first sale of stock to the public. Also referred to as “going public.”

When corporations are legally structured, they remain privately held until they complete the process of an initial private offering. Some companies remain private for as long as they are operational. However, there are significant benefits to becoming a public company, so many corporate entities choose to embrace this process sooner or later.

 

Corporations are structured so that they are beholden to their shareholders. As a result, both private and public companies have shareholders. Prior to an IPO, all shares traded in that company are subject to specific buying and selling rules only applicable to transactions involving private shares. Once an IPO occurs, a company will have public shares in the marketplace. However, this does not mean that all of a corporation’s private shares have suddenly been made public. Most of the time, certain stakeholders choose to retain their privately held stocks, even as the corporation makes a host of other shares available for public trading. As a result, each share remains subject to trading rules that apply to it specifically based on its classification as public or private.

 

Once an IPO is complete, a corporation is legally considered a public company and becomes subject to significant scrutiny, reporting requirements and other legal restrictions imposed primarily by the U.S. Securities and Exchange Commission. Prior to an initial public offering, a corporation will generally work with an underwriting firm or investment bank in order to prepare. Among the most critical decisions that will need to be made are how many shares to offer and at what initial price will those shares be traded.

 

A company can only have one IPO. In the event that a corporation chooses to release another set of authorized shares for public trading subsequent to an IPO, that event is referred to as a secondary offering and is subject to the SEC rules that govern that event.

 

  1. Officially announcing to your family and friends that you have a girlfriend, even though you have been spending four nights a week at her place for seven months. “Going public” may or may not be inspired by a conversation that begins with her asking if you are embarrassed of her and ends with her threatening to leave if you don’t “grow up.”

 

EXAMPLE:

The world took particular notice when Facebook finally went public and completed its initial public offering in 2012. The social media giant’s IPO was the most profitable IPO in technology history – its peak market capitalization topped $104 billion. However, due to scandals surrounding the public launch, this staggering IPO is considered a “botched job” and impacted the reputations of many involved in the initial sale.