The initial public offering is when a private capital company begins to offer shares in its shareholding to the public. This, by issuing new Actions.
Through an initial public offering, a company issues shares for
the first time to receive capital from new investors. For this, a public act is
carried out.
This procedure is known in English as an initial public offering (IPO).
This is an important milestone for any firm, as it goes from being a private
entity to being a public one. But, it is worth clarifying public does not have
a sense of belonging to the State but that its information is public.
Why is company information made public? Because this is a
requirement to be listed on the stock markets. This is required by the
corresponding regulatory entities, such as the National Securities Market.
Any company that wants to be listed on the secondary markets
like the stock market has to publicize its financial statements and
continuously report important facts of interest to investors.
Why do IPOs?
An initial public offering is executed primarily to obtain financing from new
investors. In return, these agents receive a share of the company’s capital.
Thus, this public offer is an alternative, for example, to acquiring debt or
financing through larger contributions by the firm’s current partners.
An IPO takes place in a context in which the company will expand. Before this milestone,
its sources of financing have been funds from a small number of shareholders.
These are usually the founders and their relatives (family and friends), angel
investors, and funds from venture capital.
However, with the IPO, an important leap is made. The company
receives more investors and a greater volume of capital to finance its
operations.
In this sense, it is worth emphasizing that this public offer is not possible
at an early stage but rather when the company is already moderately consolidated.
That is, the profitability of your business has been proven.
How is an IPO done?
To conduct an initial public offering, proposals will first be privately
solicited from potential subscribers. Or you can also launch a public
announcement.
Each aspiring subscriber presents their plan, with an offer price for the
shares, number of shares, an estimated period for going to market, etc. Thus,
the different offers received are discussed.
The chosen underwriter is in charge of preparing the documents required by the
regulator, presenting the company to investors, and issuing the shares.
Advantages and disadvantages
Among the advantages of an initial public offering, we can highlight:
- The company accesses a broader
market to obtain financing.
- It increases the prestige and
improves the public image of the company.
- As its financial information is
public, the company can access credit with better conditions.
However, we can point out some disadvantages:
- An IPO implies an investment,
both in the process and after the public offer. This is because the
company must be concerned about its relationship with the investing
public.
- In line with those above, the
price of the company’s shares on the stock market can become a distracting
element for management. In other words, greater attention may be paid to
the company’s share price than to the net profit results, for example.
- The company is obliged to notify
relevant facts, as mentioned above. This may mean revealing business
actions or strategies that the firm, in principle, would want to keep
secret so that its competitor does not know that information, for example.
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