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Initial Public Offering (IPO) explained

Monday, October 01, 2018

When looking at different ways to raise funds for a business, an initial public offering or IPO may appear an attractive option.

What is an IPO?

An initial public offering (IPO) occurs when a privately held company offers its first sale of stock to the public. An IPO is also referred to as a ‘float’ or ‘going public’. In Australia, most IPOs involve listing the company on the Australian Stock Exchange (ASX).

Why Go Public?

A company may choose to ‘float’ or go public via an IPO to raise capital to fund growth, reduce debt, or provide foundation owners with an opportunity to reduce their investment in the business or exit completely. An IPO offers the founders (and any early investors in the business) a chance to profit from their initial investment by selling their own shares.

There are several perceived benefits to floating a company on the stock exchange:

  • Easier access to capital
  • Help attract and retain expert management and employees
  • Increase the exposure and prestige of the company
  • Aid in the acquisition of other companies
  • Raise larger amounts of money than other funding options
  • Increase the liquidity of current shareholders

There are several disadvantages:

  • The company’s legal, accounting and marketing costs increase significantly
  • There is a significant increase in the requirement to disclose business information, including financials
  • Increased time and effort from management and staff to meet new reporting obligations
  • Reporting may deliver useful information to competitors and suppliers
  • The risk that the IPO will not raise the expected amount of capital
  • Shareholders gain voting rights and can, through the Board of Directors, influence company decisions
  • Increased risk of regulatory or legal issues relating to the shareholders and the stock market

How does an IPO work?

An IPO is only one way of going public. In an IPO, a company works with an underwriter to:

  • analyse the business
  • compile information on the financial operations and future of the company
  • have the company’s financial statements audited
  • prepare and file the prospectus with ASIC

Trading on the open markets offers investors liquidity. Privately owned shares can be hard to value, and even harder to sell. The stock market offers ready buyers and sellers valued prices and information on shares.

Investing in an IPO

If you are interested in investing in an initial public offering, you should review the company prospectus and related information carefully. The prospectus will be lodged with the Australian Securities and Investments Commission (ASIC) and contains key information, that meets legal obligations regarding the company itself, its float, and how it intends to use the new funds.

From the prospectus, you’ll learn about the securities or shares on offer including:

  • How many are on sale
  • How you can buy them and in what time period
  • Company information such as financials and operations
  • Any risks associated with the float

It is important to do your own research and question the information in the prospectus before you buy shares. If the prospectus has been replaced or has a supplementary, it may be a sign the original prospectus was inadequate. Check it carefully before making any decisions.

Whether you are considering an IPO for your business, or looking to buy securities from an IPO, it’s important to review all the available information and risks before making your decision.

PrimaryMarkets is a global independent unlisted securities and investments platform and marketplace for sellers, buyers and intermediaries. Contact us to discuss the ins and outs of initial public offerings.

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