January 20, 2023
When companies reach a certain size and wants to raise money to continue fueling growth, it might consider becoming a public company. This happens through an initial public offering (IPO). An IPO is the vehicle a company uses to raise equity capital from public investors.
The process itself is detailed and complex, but simply put this transition from a private to a public company gives it the financial fuel to grow and expand. Private companies initially grow through early investments from the founders, family, friends and perhaps some professional investors such as venture capitalists and angel investors. By going public, the company can attract a much larger group of investors, both institutional and individual shareholders.
The advantages of going public come with some responsibilities as well. Retail shareholders literally become owners in the company and management must respond to them accordingly. There are also SEC regulations that public companies must follow.
An IPO is the act of a private company going public. While raising capital is often the reason for the IPO, company owners can also be motivated to go public as a way to realize gains from their investment since IPOs typically allow for a share premium for current private investors.
IPOs began in 1602 when the Dutch East India Company allowed every resident of the Netherlands to buy shares to help finance its trade in spices and other commodities. The first U.S. IPO occurred in the late 1700s, the largest being an IPO for the Bank of the United States, which raised $8 million from private investors in addition to $2 million from the federal government.
IPOs remain a critical way for companies to raise money and individual investors to buy into them and profit. Over the past few years, the number of IPOs have boomed and busted, often along with the volatility of the overall economy.
IPOs declined in volume and value between 2014 and 2016. IPOs increased again in 2017 and built through 2021, a record-breaking year in terms of volume (mostly because of public offerings by special purpose acquisition vehicles – SPACs). As of late September 2022, there were 992 IPOs (a decline of 44% compared to the previous year), raising $146 billion (a decline of 57%), not a surprise given the volatility of last year’s markets. 2022 was the worst year for IPOs since 1990.
Not every company becomes public. First, the company must meet requirements by the exchanges on which it will trade and the Securities and Exchange Commission (SEC) to hold an IPO. Companies that meet the requirements and want to go public hire investment banks to market, determine demand, set the IPO price and date, and advise the company through all the legal and regulatory hurdles.
IPOs have raised a staggering amount of money for some companies, especially in the technology sector. A few of the largest IPOs of all time are:
Alibaba Group Holding Limited (Tii:BABA)
Market Capitalization as of Jan. 16, 2023: $309.79 billion
Amount Raised at IPO: $25 billion
SoftBank Group Corp (Tii:SFTBY)
Market Capitalization as of Jan. 16, 2023: $67.72 billion
Amount Raised at IPO: $23.5 billion
Mobileye Global Class A Common Stock (Tii:MBLY)
Market Capitalization as of Jan. 16, 2023: $26.45 billion
Amount Raised at IPO: $16.7 billion
Becoming a public company isn’t intrinsically good or bad. It is simply a way for companies to raise capital and for owners to profit from their hard work building the company. The way in which that happens is through an IPO.
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