An IPO is an initial public offering of a companys stock. This is done either to raise capital for a new company or for an existing company to simply offer shares of stock for the first, known as going public. In either case, there is a certain set of steps in the IPO Process that must be followed.

The first thing a company must do before issuing stock is file a registration with the Securities and Exchange Commission (SEC.) Since the SEC has the power of nullifying any attempt to go public, a companys statement must be thoroughly accurate. Data concerning the financial health of the company must be entirely truthful. Due diligence should be the order of the day. Putting a company out onto the IPO Market is serious business. Every step in the IPO Process must be done carefully.

After (and sometimes before) the registration statement is finished, companies engage the services of one or more investment bankers. The role of any investment banker(s) is mostly twofold. First, it is to distribute the companys prospectus to prospective buyers of the stock. The prospectus is a legal document that details among other things the companys market, financial statements, executive biographies, and a projected price range for the stock. It is sometimes referred to as a red herring. It is so named because on the cover of the prospectus, and in red ink, is a notice from the SEC that the companys stock may not be bought or sold until the registration statement has been approved.

The second function of an investment banker or underwriter is to buy the companys shares and resell them to the public. Usually a road show, is launched, during which the investment banker and company executives engage potential investors to explain company strategy and promote the stock.

By selling its stock to an underwriter rather than selling it directly to the market, like the New York Stock Exchange, a company receives its money upfront and does not incur the risk of failure in the market. Additionally, they do not have to assume the costs of promotion. On the other hand, they are giving up the possibility of higher share prices that could be generated by the market.

Sales to the underwriter cannot happen until the SEC has approved the registration. Upon approval, and typically the day before the public offering, company executives and investment banker determine how many shares to sell and what the price will be. When the exchange has been made between the company and the underwriter of funds and stock, the offering is complete.

Underwriters carefully look into a company before deciding to purchase securities. Before taking the risk, they want to feel confident that the value of the stock will be higher than what they paid for it. The potential exists for great profit but also for great loss.

It goes without saying that while the risk is high for investment bankers, the IPO process offers huge potential for profit. It can be very exciting to have an opportunity to pay a low price for stock that will someday be worth a fortune.

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