Page 120 - Initial Public Offering - An Introduction to IPO on Wall Street

To ensure that the issue is completely subscribed/over-subscribed by the public shareholders,
IPOs are always priced lower than their value even if it means the issuer will not earn the
maximum value of its shares.

When an IPO is priced lower than its value, the IPO shareholders expect the price of the shares
to increase on the day of the sale. This stimulates further demand for the issue. Besides,
underpricing offsets the risk assumed by the shareholders by investing in the IPO. An IPO can
be considered to be “good” if the offering is oversubscribed by at least two to three times.

5.2.5 Step 5: Going Public
It's time for the IPO to go public now that all is settled! The underwriter will issue the
preliminary shares to the public on the date agreed upon. Going public refers to the first
issuance of its stock on an open exchange by a business.

Going public is a perfect way of raising money for many businesses. Although a bank loan may
be an alternative, regular principal and interest payments are needed that businesses —
particularly those that are growing and short on cash — may not find feasible. Going public
fixes this issue in a way, because investors do not need cash payments every month—or any
payments, unless the business is sold.

Going public, however, comes with a wide range of responsibilities, including legal
obligations, special conditions for governance, and a range of disclosure standards that
consume time and are costly. Going public also means adjusting to the expectations of analysts,
media attention, and demand for tackling both short-term and long-term share price
movements.

The process of going public often starts when a growing business needs extra capital to expand
its operation. Besides, venture capitalists can use IPOs as an exit plan (a strategy for giving up
their stake in a business).

Getting in touch with an investment bank and then making some key decisions, such as the
volume and value of the shares to be issued, is needed to start the IPO process. Investment
banks assume the duty of underwriters or the shareholders of the securities who accepting their
legal liability.

The underwriter's objective is selling to the public the shares for more than what was given to
the business's first owners. Deals between the issuing firm and underwriting banks can be
valued as high as $1 billion or more.

There are both positive and negative consequences of “going public” that must be taken into
account by businesses. For example, Going Public enhances the cash position, facilitates
acquisitions, broadens ownership, and raises credibility.

The disadvantage with “going public” is that it increases pressure on short-term expansion,
raises costs, introduces more management and selling constraints, demands public disclosure,
and causes previous business owners to surrender their decision-making power.

Overview of the Requirements for Going Public

We have already discussed the requirements for an IPO. However, it’s good to recap some of
the main requirements for becoming a publicly-traded company. Taking a business public is
the greatest dream and marker of achievement for many entrepreneurs, one that is followed by

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