Unpacking the Initial Public Offering (IPO)

Initial Public Offering (IPO)An Initial Public Offering, or IPO as it’s often referred to, is essentially the moment a private company offers its shares to the public for the first time. This move allows the company to gather funds from ordinary people. The transition from a privately-owned firm to a public one can offer a significant financial boost for the current private investors, while allowing new people to come onboard as investors.

 

Deciphering the Initial Public Offering Process

The road to going public isn’t a walk in the park—it’s a lengthy and intricate process that can often be too taxing for companies to take on by themselves. A company aiming for an IPO needs to brace itself not just for a surge of public attention, but also for a deluge of paperwork and financial reports as part of the compliance with the rules of the Accounting and Corporate Regulatory Authority (ACRA), which supervises public corporations. Before they can share their offering with the public, they need to draw up a prospectus and get it registered with the Monetary Authority of Singapore (MAS).

Due to these complexities, it’s common for a company intending to go public to recruit professionals like an underwriter and an investment bank. These entities guide the company through their IPO journey, helping them set a reasonable initial price for shares and preparing necessary investor documents. They also host events to woo potential investors.

 

Why Go for an Initial Public Offering (IPO)?

While an IPO signals the first chance for the public to buy company shares, it’s key to bear in mind that a major aim for an IPO is to let a company’s early investors monetize their stake.

Think of the IPO as a shift in a company’s lifespan, marking the transition from one growth phase to the next. Many early investors might view this as an opportunity to get a return on their investment in a promising startup. Investors in mature private companies on the verge of going public may also see this as a chance to sell some or all of their holdings.

Companies opt for an IPO due to various reasons, many of which revolve around raising funds or boosting their public image. These include:

  • Raising capital by selling shares to the public. The raised funds can be directed towards business expansion, investing in research and development, or reducing debt.
  • Alternative funding avenues—venture capitalists, private investors, or bank loans—could be costlier.
  • An IPO can multiply a company’s visibility.
  • A company may want the prestige that comes with being a public entity, which could lead to favorable lending conditions.

That said, going public isn’t all sunshine and roses. It might make raising additional capital simpler and cheaper, but it also complicates many other elements. For instance, public companies have to maintain transparency by filing regular financial reports. They also have to answer to their shareholders while meeting legal demands related to executive stock trading, asset sales, or acquisitions, amongst others.