An initial public offering is usually reported as an event — a date, a price, a first-day move. It is better understood as a process lasting the better part of a year, in which the visible listing is close to the last step. Most of what determines whether an IPO succeeds happens before anyone can trade the shares.
Why companies go public
The textbook reason is capital: selling new shares raises money for expansion without incurring debt. In practice several other motives are often at least as important.
Liquidity for existing shareholders. Early investors and employees hold stock they cannot easily sell. A listing creates a market. Where an offering consists largely of existing shares rather than newly issued ones, the company itself raises nothing — the proceeds go to selling shareholders. This distinction is disclosed in the prospectus and frequently ignored in coverage.
Acquisition currency. Publicly traded stock with an observable price is far easier to use as consideration in takeovers.
Credibility. Audited public reporting and regulatory oversight can matter commercially when selling to large or regulated customers.
Against these sit real costs: continuous disclosure obligations, audit and compliance expense, exposure to quarterly expectations, and the loss of strategic privacy. Plenty of companies capable of listing decide the trade is not worth it.
Step one: preparation
Long before any filing, the company must become capable of being public. That means audited financial statements prepared to the required standard for several prior years, internal financial controls that will survive audit, a board with the requisite independent directors and committees, and the resolution of legacy issues — unusual share classes, related-party arrangements, unclear intellectual property ownership.
This phase routinely takes a year or more and is where deals most often quietly die.
Step two: appointing underwriters
The company selects investment banks to manage the offering. The lead underwriter — the bookrunner — coordinates the syndicate, advises on structure and valuation, and manages the process.
Most large IPOs are firm commitment underwritings: the syndicate purchases the entire offering from the company at an agreed price and resells it. The banks therefore carry the risk of unsold shares, which gives them a direct interest in pricing conservatively — a structural tension with the issuer, which wants the highest achievable price.
Underwriting fees are conventionally a percentage of gross proceeds, commonly cited around the mid single digits for smaller offerings and lower for very large ones.
Step three: due diligence and the registration statement
Underwriters and lawyers conduct extensive due diligence — financial, legal, commercial — because they carry liability for material misstatements in the offering document.
The output is the registration statement, filed with the securities regulator. In the United States this is the Form S-1; equivalents exist in other jurisdictions. It contains the audited financials, a description of the business and its strategy, management biographies and compensation, ownership structure, use of proceeds, and an extensive risk factors section.
For anyone assessing an IPO, this document is the single most valuable source available. It is written under legal liability, which makes it markedly more candid than any marketing material. The risk factors section in particular describes, in the company’s own words, what could go wrong.
Step four: regulatory review
The regulator reviews the filing and issues comment letters requiring clarification or additional disclosure. The company files amendments in response. Several rounds are normal, and this correspondence typically becomes public — a useful and underused source, since it shows precisely which claims the regulator thought inadequately supported.
Importantly, the regulator does not approve the offering as an investment or assess whether the price is reasonable. It assesses whether disclosure is adequate. A company can complete registration and still be a poor investment; that judgement is left entirely to buyers.
Step five: the roadshow and book-building
With a preliminary prospectus containing an indicative price range, management presents to institutional investors over roughly one to two weeks.
Simultaneously the underwriters build the book: collecting indications of interest specifying how many shares each investor would buy at what price. This is the actual price discovery. A heavily oversubscribed book allows the range to be raised; weak demand forces it down, or postponement.
Communication during this period is tightly constrained by regulation, to prevent the offering being marketed on claims outside the prospectus.
Step six: pricing and allocation
The night before trading, the company and underwriters set the final price and allocate shares. Allocation is discretionary, not pro rata: underwriters favour institutions expected to hold rather than immediately sell.
IPOs have historically tended to price below where they first trade, producing a first-day gain often described as “money left on the table.” Explanations vary — compensation to investors for committing capital to an unproven listing, insurance against a failed deal, and the underwriters’ own incentives among them. Whatever the cause, a large first-day jump is not unambiguously good news for the issuing company: it indicates shares were sold below what buyers were willing to pay.
Step seven: stabilisation and the greenshoe
Most offerings include an over-allotment option — the greenshoe — permitting underwriters to sell additional shares, conventionally up to around 15% of the base offering.
Underwriters typically oversell the deal, creating a short position. If the price rises, they exercise the option to cover. If it falls, they buy shares in the open market to cover instead, supporting the price. This stabilisation is legal, disclosed and time-limited — but it does mean early trading is not purely organic.
Step eight: the lock-up expiry
Insiders — founders, employees, pre-IPO investors — are contractually barred from selling for a set period after listing, conventionally in the region of three to six months.
Expiry is a scheduled, publicly known date on which a large volume of shares becomes sellable. It is one of the more predictable supply events in equity markets, and the terms are disclosed in the prospectus.
The alternatives
Direct listing. Existing shares are admitted to trading without a new issue and typically without underwriters. It avoids underwriting fees and first-day underpricing, but raises no capital in its classic form and provides no price support.
SPAC merger. A private company merges with an already-listed cash shell. It can be faster and allows forward projections to be used in marketing in ways a conventional IPO restricts. Sponsor economics dilute other shareholders, and post-merger performance across the wave of such deals has been widely scrutinised.
What to read first
- Use of proceeds — does the company receive the money, or do selling shareholders?
- Risk factors — read them fully; they are the most honest section.
- Share class structure — do founders retain voting control through super-voting shares?
- Lock-up terms and expiry dates.
- Historical financials, with attention to cash flow rather than reported profit.
- Related-party transactions in the notes.
This article is general information and journalism, not investment advice. See our Editorial Policy.