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What is an Initial Public Offering (IPO)?

What is an Initial Public Offering (IPO)?

Some helpful information on when a private company ‘goes public’ for the first time

1st November 2018

Introduction

An Initial Public Offering (sometimes referred to as a stock market launch, or going public) is when a company decides to list their shares on the stock exchange (ASX) for the first time. This means that shares in the company can be owned by individual and institutional investors. Companies tend to do this in order to raise revenue and bring their company to a public and global stature, but it can come with many risks, and does not always have the desired effect.

How is an IPO Conducted?

Launching an IPO follows a strict process:

Prospectus

This involves the company hiring an underwriter from a bank to negotiate and set out the terms of the IPO. The Prospectus is a proposal which outlines the amount of money the company will generate as a result of the IPO and other important information. The Prospectus is a document which is designed to educate possible investors and help them decide whether they want to invest or not.

Applications

Depending on who the company wishes to offer their shares to, hopeful investors can make an application for the shares, based on the prospectus. The applications give the company an idea of how many investors are interested. Investors may be the general public or customers of the company.

Allocations

After the applications are received and reviewed, the shares will be allocated. Sometimes the company may receive too many applications, in which case there may have to be a scale back, whereby investors could receive less shares than they initially applied for.

Listing

Once the allocations have been made, the shares will be listed on the relevant stock market, in Australia it is the Australian Stock Exchange (ASX). The shares can then be traded and their value will be affected by market conditions.

Advantages and Disadvantages of Going Public

Advantages:

  • Access to multiple investors
  • Generate future revenue and growth
  • Pay existing debts
  • Company is not liable to dips in the market and loss of share value

Disadvantages:

  • Large legal and marketing costs
  • Must divulge financial information to the public
  • Possible risk of class action lawsuits, unhappy investors
  • Vulnerable to shifts in the market
  • More publicly accountable

Examples of IPO’s

The largest and most successful IPO was conducted by the online retail and technology company Alibaba in 2014. The IPO eventually generated $25 billion for the company.

Another notable IPO was held by Facebook in 2012. It prospectus was valued at $104 billion. 460 million shares were traded and the IPO raised $16 billion in revenue.

However, Snapchat’s IPO was not as successful, when compared to Alibaba and Facebook. The IPO was oversubscribed, meaning they received more applications than they had shares to sell. It ended up raising $2.6 billion, but was prospected to make much more. Their shares were listed for just $17.

Snapchat’s unsuccessful IPO gives rise to a new debate surrounding large companies going public. It is a decreasing trend for wealthy companies to go public, where once it was an inevitable step to increase the companies’ value. Depending on a company’s business model, nowadays there is less necessity to raise capital via public investment. Previously, companies needed to raise funds to support factory growth, retail facilities and production. These days, companies either produce via contractors (such as Nike), or do not have tangible assets (such as Snapchat and Facebook).

Conclusion:

Going public can be very rewarding and can initiate the growth of your company, however it does come with a great variety of risks. Your company should be large enough to be able to take a hit if the IPO is not successful. There are several requirements you need to meet before your company can be listed on the Australian Stock Exchange. Most of the requirements indicate that your company needs to already be quite sizeable; and there are both profit and asset tests. If you are thinking of going public in the future, you should wait until your company is financially stable and ready, as IPO’s can be very risky.

Unsure where to start? Contact a LawPath consultant on 1800529728 to learn more about customising legal documents, obtaining a fixed-fee quote from Australia’s largest legal marketplace or to get answers to your legal questions.

Author
Akira Singh

Akira is a legal intern at Lawpath working in the content team. She is currently studying a Bachelor of Arts and a Bachelor of Laws at Macquarie University.