Is an Initial Public Offering Worth the Risk to a Start Up Company?


Secondary offerings

What is the definition of an IPO?
IPO stands for initial public offerings and is also known as going public. When a company goes public, it sells its first stock shares on the public market. A successful IPO is the first time a company will receive any money from the sale of stock to the public.

How does it work?
The IPO is first announced in IPO news but this is actually the last step. Then the money made from the stock is what makes the company its capital. This is why a lot of new companies will issue an IPO because they need that capital to begin growing.

However, before all of that the IPO must be introduced to the market by an underwriting investment bank. The bank aids the company by mediating with investors. The bank can also help decide the price of stock.

Why does it work?
The capital earned from the IPO can be a real boost to the company’s growth. This makes an IPO very attractive to start up companies in particular. However, investors are faced with a higher risk on new stock as opposed to what is already being traded. A lack of IPO data and history can seem unpredictable. On the other hand, if there was never any new stock introduced the current stock would soon phase out. New stock not only keeps the market current but often times can boost current stock.

How do you find out about IPOs?
Professional traders must pay attention to IPO news and calendars. This is the best way to find out which IPOs are coming up.

IPO news or an IPO calendar will tell you what companies are expected to sell shares soon. A new calendar is usually released every week because underwriters can be more specific about time frames the week before the release. However, as helpful as IPO calendars are, they are subject to change and only give investors an idea of what is about to come out, not a guarantee.

What are the disadvantages of an IPO?

  1. As beneficial as completing an IPO can be, it is not without disadvantages.
  2. It can include ongoing costs at a high price to the company.
  3. There is the potential to have to share all financial and business information.
  4. Management will have to spend a lot of time effort and attention on the IPO. It is not something that can be outsourced.
  5. There is a risk that the funding needed will not be brought in.
  6. Competitors can make use of the information that the company is required to disclose.
  7. New shareholders could mean loss of control.
  8. As is the same with any stock market moves, there is an increased risk of litigation.

Where do prime brokers come into it?
Prime brokerage is the name given to services that investment banks can offer. These are the same banks that will help and issuing company come out with their IPO. Many times these banks will have a bundle of services that they can offer and charge fees for so that it lowers the amount of risk for the bank. Services such as global custody, financing, customized technology, securities lending and operational support as well as capital introduction and risk management are all examples of services that can be offered. The issuing company can determine what will be beneficial for them and what will not. At times, the services can be excepted by the issuing company instead of some sort of collateral, depending on the investment bank’s policies.

IPO news will tell us that they could really go either way and it is the issuing company that needs to decide whether they are able to risk what is necessary in order to issue an IPO. The advantages generally do outweigh the disadvantages for most companies but being a start up company can be a difficult position to be in to make decisions like this. There are many factors to consider when deciding whether to issue an initial public offering or not so retaining the help of an experienced business lawyer may be beneficial to you.

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