What Is an IPO? (With Process and Steps Companies Can Take)

By Indeed Editorial Team

Updated June 16, 2022

Published January 3, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies resort to various financial strategies when trying to raise funds for their operations, and some of them differ based on the company type. Private companies can begin selling their stocks through an Initial Public Offering (IPO) to raise money for company operations and consequently become public. Understanding the concept of an IPO can help you learn the various requirements, rules, and processes that govern it and decide if it is worth putting your money in. In this article, we discuss what is an IPO, and outline the processes involved in introducing them into the market.

What is an IPO?

The answer to the question "What is an IPO?" is straightforward. It's the process through which a private company offers its shares to the public through new stock issuance. IPO enables the company to raise money from public investors. A company's ownership can consist of a mix of private shareholders and founders before it goes public. Going public overhauls the company as the public gains control of the ownership structure. A company's switch from private to public is vital for investors to realize their investment gains because the transition also includes a share premium for current investors.

An IPO is a massive step for companies as it provides them with access to significant sums of money, empowering them with the ability to expand their operations and grow. Companies typically price their IPO shares through underwriting due diligence. The previous private share ownership converts into public ownership, and the existing shares become worth the trading price. IPOs also offer public investors opportunities to buy shares, contributing capital to their shareholders' equity. The number of shares the company sells and their prices generate its shareholders' equity value.

Process of an IPO

Here are the processes involved when companies undergo an IPO:

Length of time

The time required to prepare and complete an IPO is about 12 weeks, and various factors influence it. These factors include the company's readiness for the IPO and the extent and nature of the necessary due diligence review. Other factors include the company's state of financial statements, necessary auditor review, market conditions, and resolving the Canadian Securities Administrators' (CSA) comments on the prospectus. The company can also require additional time to revise and update any available disclosure materials it prepared as a preliminary prospectus. They also allow the working group to review the preliminary prospectus.

Preliminary prospectus

After selecting underwriters, the first step for the company is to prepare a preliminary prospectus. A preliminary prospectus includes the complete and plain disclosure of all facts relating to the securities the company is about to offer. It also contains information about any risk factors that may be relevant to the business. The board of directors approves the complete prospectus and files it with the appropriate securities commissions. The regulatory authorities subsequently review and leave comments on the preliminary prospectus within ten days of receiving it.

Contact with media

The securities administrators have formulated various rules regarding contacting the media before and after filing the preliminary prospectus. They prohibit any publicity that can condition the market for the company's securities or promote public interest in the company before the preliminary prospectus is available. The company is also supposed to avoid giving more information than there is in the preliminary prospectus after the company has filed it. It's vital that the company and its officers implement procedures that appropriately restrict media contact throughout the IPO process.

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Evaluating the effect

The regulatory authorities permit the companies to evaluate their IPO's effect through underwriters. The companies can contact accredited investors confidentially, seeking their expression of interest within 15 days after filing the prospectus. Issuers and underwriters can also record the investors they contacted and obtain written confirmations to keep the IPO information confidential. The authorities prohibit this evaluation during IPOs of companies already public in a foreign jurisdiction. The restriction also covers subsidiaries of a public company if the proposed IPO is relevant to the holding company.

Quiet filing

A quiet filing entails a company request for approval from the regulatory authorities to pre-file a preliminary prospectus confidentially. The company also has the opportunity to receive and respond to the securities commission's initial comments before publicly filing the preliminary prospectus. For example, companies desiring a Canada-only IPO can request that the regulators allow them to complete a quiet filing. The regulatory authorities then consider the potential effects of rejecting the company's quiet filing request. Such filings can reduce a company's public exposure during market uncertainty. They also enable companies to address regulatory concerns or comments before a public launch.

Financial statement preparation

IPO-related prospectuses include audited comparative financial statements of the company covering the preceding three years. They also include unaudited comparative financial statements concerning the most recent quarterly interim periods, along with the financial statements for the same periods for companies that have recently been or are likely to be subject to acquisition. These companies include a pro format presentation that gives effect to the relevant acquisition. Companies also explain any financial measures in the prospectus that don't conform with accounting principles.

Waiting period

This is the period between filing the preliminary and the final prospectus, serving three purposes. Firstly, it gives a potential investor ample opportunity to review the prospectus before making purchases. It also enables the underwriters to examine the market's strength to determine the offering price and deal size. And finally, the waiting period also allows the securities commission to evaluate and comment on the preliminary prospectus. Potential investors can't purchase the securities under the prospectus until the company files its final prospectus. The underwriters can seek investor interest and begin developing a tentative book of orders instead.

Resolving regulatory comments

The principal regulator is first to issue a comment letter on the preliminary prospectus. The letter is usually in two parts, with the staff accountants providing comments on the financial disclosure and the staff lawyers providing general comments. It's essential that the companies respond to the comments promptly to keep the momentum of the process going. The principal regulator subsequently issues a second comment letter containing their follow-up comments and any other comments from the securities commission. Companies often respond to the second comment letter, similar to how they responded to the initial comment letter from the principal regulator.

Pricing

The next step is usually pricing. Pricing entails the company and underwriters negotiating the price and amount of the securities they're offering. The pricing is generally based on the order book's state and feedback from potential investors during the prospectus' marketing period. Companies commonly seek price points that enable distributing the number of securities they intend to offer and relating it to the total proceeds they intend to raise. In contrast, the underwriters seek prices that guarantee the IPO's oversubscription and the secondary market's strength. The underwriting agreement subsequently reflects the consensus on IPO price and its quantity.

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Final prospectus

The final prospectus reflects the company's changes in the preliminary consensus resulting from the securities commissions' comments. It also includes up-to-date information regarding the price and number of securities the company offers. It's necessary that the company's board of directors sign and approve the final prospectus. The company then files the final prospectus, and the principal regulator subsequently issues a receipt on its behalf and other provincial and territorial securities commissions. Underwriters can confirm sales to the investors immediately after the principal regulator issues the receipt. The company then distributes the prospectus to the investors.

Withdrawal rights

Securities regulations in various jurisdictions give investors the right to withdraw from their agreements to buy securities. The investors can only exercise this right within two working days of receiving the prospectus and its amendments. Investors are legally bound to complete their purchase after the IPO closes. These rights require that companies forward the final prospectus to investors promptly because the cooling-off period begins after the investors receive the final prospectus. The IPO commonly closes about five working days after the company files the final prospectus to give the investors ample time to exercise their withdrawal rights.

Amendment of the prospectus

Prospectus amendments can be necessary during the waiting period for various reasons. These reasons can include a material adverse change in the company's business, affecting the information in the preliminary prospectus. Material changes usually require an amendment filing. Companies can also voluntarily file a completely amended and restated preliminary prospectus or an amendment to the current prospectus. These provide updated information and reflect the comments a company receives from the securities commissions before marketing. It's vital that companies deliver preliminary prospectus amendments to anyone who received the prior prospectus.

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Closing

The IPO closes when the company issues and sells its securities to the underwriters in exchange for their offering price. IPO closing commonly occurs about five working days after the company files the final prospectus. The exact date for closing is subject to negotiation, and the underwriting agreement subsequently reflects it.

Please note that none of the companies, institutions, or organizations mentioned in this article are affiliated with Indeed.

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