How does IPO process work? A Complete Guide

IPO stands for initial public offering. This is the event when a company offers its first-ever share to the public. At this point in time, a private company becomes a public company.

In a private company, the ownership is owned by a few people and mainly consists of the founder, friends, family members, or private investors such as venture capital firms.

In a public company, ownership is offered to the general public via the sale of shares.

What is the purpose behind IPO?

The primary reason of IPO is to scale up the business. With IPO, eventually, the masses become eligible to put their money into the Company. Consequently, with the additional capital raised by selling shares, a company utilizes the money to generate more business.

However, going big is not the only objective of issuing an IPO. Many large corporations are still private. For instance, IKEA, State Farm, and Huawei are private companies and do not offer their shares to the public.

The IPO process starts with engaging an underwriting firm. Generally an investment bank.

The investment bank puts up the money to fund the IPO. Essentially buying the shares before listing them on the stock exchange.

The firm works with the Company to determine the offering price, the number of shares to be issued, and the optimum time to bring the Company to the public market.

IPO process – Step-by-step guide

  1. Select an underwriter – typically an investment bank that gives IPO administration and marketing services. Also, an investment bank sells shares to public investors on behalf of the Company. This process is called the underwriting of stocks.
  2. Due diligence – private business undergoes due diligence by an underwriter/ investment bank and legal consultants to evaluate the business against certain parameters.
  3. Comply with regulatory requirements – the team working on IPO fulfills the IPO-related regulatory requirements and submits the required documents to regulatory bodies. This process includes filing a registration statement with the Security and exchange commission (SEC). This statement includes the Company’s operations, financials, and management information. After careful evaluation of the Company’s disclosures, SEC gives a date of IPO.
  4. Prospectus – IPO team prepares a prospectus and includes the key information about the financials, future projections, and the Company’s operations. This is done to test the waters and offer the shares to institutional investors such as hedge funds, mutual funds, and endowment funds. This is done to generate interest in the IPO and help the underwriter to determine the IPO price and demand for shares. The IPO team also prepares IPO allocation showing how many shares each investor will get. Sometimes IPO will be oversubscribed. It means more investors are willing to buy stocks than the number of shares available.
  5. IPO day – finally, on the IPO day, the Company sells its shares as per the subscriptions confirmed.
  6. Public trading – the investors who receive the shares can publicly trade the shares. That’s how stock becomes public.

How long does it take for IPO to complete?

It takes from 4 to 9 months to complete the process of IPO. There are tons of requirements to be fulfilled before going public.

The timeline mainly depends on the size of the business, the readiness of the information for due diligence, and SEC requirements.

What is the role of the underwriter in an IPO?

Underwriter, basically an investment bank, provides administrative and marketing services. All sorts of admin services, such as fulfilling SEC requirements, determining IPO price, and conducting IPO due diligence, come under the purview of an underwriter. In terms of marketing services, the underwriter market the shares to institutional investors to create traction before IPO. Finally, a private business cannot sell its shares directly to the public. Instead, an underwriter sells these shares to investors on behalf of the business.

How many parties are involved in an IPO?

Following is a list of key parties which play a critical role in making an IPO possible.

  • Underwriters – for admin and marketing purposes
  • Legal advisors – advising the Company on critical legal matters.
  • Tax advisors – to evaluate tax exposures
  • Accountants to prepare financials of the business
  • Public relations firms – to spread awareness among high-profile investors and ensure that IPO gets positive media coverage.

What is IPO due diligence?

Financial and industry experts IPO due diligence to evaluate the historical financials and potential risk factors in case the business goes public. Following are the key areas investigated in an IPO due diligence exercise.

  • Corporate records – certificate of incorporation, list of trade names, minutes of the meeting of BOD, list of jurisdictions in which the Company operates, business policies, corporate governance, etc.
  • Stockholder information – list of owners and the percentage of holdings, list of any oral or written promises to issue stock, etc.
  • Financial information – audited financial statements, representation letters issued by management to auditors, description of financial control guidelines, management accounts, etc.
  • Taxes – copies of federal, state, local income, and sales tax returns submitted, any open issues with the tax authorities, level of compliance with the tax laws, etc.
  • Operations – list of high-volume accounts payable of the Company, inter-company agreements, contracts with major customers, material agreements with government bodies, etc.
  • Sales and marketing – marketing agreements, market research reports, company products and services list, company competitors, agreements with sales force, etc.
  • Employees – employee contracts, organizational charts, commitments made by the Company to its employees, and the Company’s pension plans.
  • Tangible properties – title deeds of properties, mortgages, lease agreements, etc.
  • Litigation and open audits by the authorities.
  • Foreign operations.
  • List of patents and intellectual properties.

What happens in an IPO roadshow?

A roadshow is a series of presentations in different locations made by the Company’s management for the investors before the IPO. A roadshow is a sales pitch to present the Company to potential investors. The management responds to investors’ questions. The primary objective of an IPO roadshow is to create demand for the Company’s future IPO.

How is the IPO price decided?

Theoretically, an IPO price is determined based on the issued shares’ demand and supply. If the demand is high, it will be classified as IPO over-subscribed. On the flip side, the future IPO will be under-subscribed if the demand is low.

Essentially, IPO price relies not only on the business’s valuation. Also, the timing of the IPO and overall demand play a very key role in determining the IPO price. Two identical companies with the same valuations could have different IPO prices. Why? Because the prevailing stock market factors significantly influence the IPO price.

Benefits and drawbacks of issuing an IPO to a company

Let’s briefly examine the key advantages and disadvantages of an IPO.


  • Attract more capital.
  • Share valuations become higher because of public trading.
  • Mitigate interest costs by replacing it with equity raised through IPO
  • An IPO opens new avenues to make strategic partnerships with large corporations.


  • IPO is a very hectic process for the management of the Company. It takes from 4 to 12 months to complete the IPO process. The top management and key employees are always occupied with fulfilling the regulatory and legal requirements for IPO readiness.
  • The Company incurs huge costs in the IPO process. Underwriters and other consultants charge hefty fees during the whole process.
  • Public companies focus more on achieving short-term goals than on the big picture. Otherwise, the share price may decrease if the public Company fails to achieve its quarterly targets.

How to track the upcoming IPOs in 2022 and 2023

Interest investors can track upcoming IPOs in NASDAQ, NYSE, IPO monitor, and Google news. These websites publish upcoming IPOs and the status of their IPO process. Also, you can track future IPOs, which are at the initial stage of IPO planning.

Can an individual buy an IPO?

No. During the IPO process, the underwriters ensure enough demand for the IPO before it goes into the hand of the public. Therefore, most institutional investors and big investment funds subscribe before the shares go public trading.

However, there are a few exceptions in which an individual can directly access shares and pre-subscribe his shares before the IPO date.

  • If you have a considerable investment and essentially act as an institutional investor.
  • You are among the friend or family, and private owners include you in shares allocation.

IPO is definitely an exciting event and is considered a ticket to riches. There are certain ways by which you can indirectly participate in an IPO. You can invest in a mutual fund that directly invests in IPO. Also, certain brokers have an IPO access program that allows you to subscribe to your desired number of shares.

Risks of investing in an IPO for investors

  • There are chances that the shares are overvalued. The investor is at risk because, after the market correction, the shares will move to their real value.
  • Market volatility also plays a vital role in the success or failure of an IPO. Since the stocks are at the initial phase of trading with no prior history, the volatility tends to be higher than stable stocks.
  • Investors may not have complete knowledge of the Company. Also, the business operations could be too specialized, and investors may not foresee the challenges that could be faced by a particular industry.

Most successful IPOs in the history

  • Saudi Aramco raised $25. 6 billion on 5 December 2019. Saudi Aramco, a Saudi-based company, explores, refines, and sells crude oil and natural gas.
  • Alibaba – it raised $21.8 billion on 18 September 2014. Alibaba owns an online e-commerce platform called AliExpress and other related businesses in the retail and trading space.
  • SoftBank – it raised $21.3 billion on 10 December 2018. SoftBank, a Japanese bank, provides fixed-mobile lines, communication, and ISP services.
  • Visa – it raised $17.4 billion on 18 March 2008. The Company provides debit and credit card processing services and reports processing more than 200 billion transactions annually.
  • Facebook – raised $16 billion on17 May 2012. The biggest social networking website.

IPOs that failed

  • – raised $82.5 million in February 2000 and filed for bankruptcy in October 2000.
  • Uber – a ridesharing platform, offered shares at $45 and closed trading at $41 on the very day of IPO.
  • – the share price skyrocketed to 600% on IPO day, and the share went to $27. However, after two years New York Stock Exchange delisted its shares as it fell to less than a dollar.

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