At one point or other companies may seek to raise money from the public by selling shares, securities or other financial instruments through a process called public offering. If a privately owned company is going through these motions for the first time it is then known as an Initial Public Offering (IPO).
It is however only known as a public offering when the company in question is selling these securities to more than thirty five separate entities. Otherwise this is classified as a private placement. Any subsequent sale of shares to the investment people that meets this criterion also falls under this term.
The primary reason for the exercise is to raise funds either for business expansion in the form of mergers and or acquisitions, infrastructural upgrades etc . In other cases the money is used to fund stock options for directors and key members of staff to keep them loyal and motivated in building the company. There are times when it is a case of vanity, the allure of the prestige associated with an initial offering can prove irresistible to the owners.
It is both a cost effective and shrewd way of accessing capital without relinquishing ownership or control of the company. Other methods of raising capital could involve ceding some veto powers to say venture capitalists that are willing to invest in the business. This is usually too high a cost for companies that have the option of initial offering.
There are also situations when the company might be forced into making a forced IPO. This is usually the case when a company has met certain conditions set by a country’s Securities Exchange regulatory body. These conditions usually have something to do with the capitalization and number of shareholders. Some companies do not want initial offerings because there are certain oversight and regulatory reportage they must go through that usually add their operating costs.
A company which is considering this course of actions must first seek the SEC (Securities and Exchange Commission)’s approval. Following this, evaluating the company and deciding how many shares they wish to sell is necessary. The value of the company is determined by underwriters and goes under the name of capitalization; this helps determine the initial price of the offering share.
The regulator might ask for more information such as a background of the company and its director’s individual records. What follows is a period when the regulator goes through all this information and if the approve they then set a date for the sale of these securities. The investment bankers then come up with the initial offer share price which is dependent on the prevailing market conditions.
If everything takes off without a hitch the shares are traded on the market on the specified date and hopefully enough of the investing public take the company up on its offer. When the shares demanded by the general population exceed those that the company is selling the public offering is said to be oversubscribed. Subsequent offerings can be arranged should the company need to raise further capital subject to SEC approval.
Investors, you can find complete details about the benefits of an initial public offering at MSN Money now!