An initial public offering is a process whereby a company becomes publicly traded by selling the stocks to the public. There are many advantages, along with disadvantages that companies, and the public may face while issuing an IPO.
Let’s start with the benefits the initial public offering provides. First of all, it gives access to risk capital. The majority of companies find it difficult to raise equity from venture capitalists or other prominent investors. In such cases, it is more affordable and convenient for companies to seek investment from the public, who might be valuing the company generously.
Furthermore, the public image of the company also increases once it is publicly listed. From the company’s perspective, it will also gain awareness and become more financially stable as financial institutions will start to lend more money. One of the most essential and advantageous characteristics of IPO is that it gives entrepreneurs an opportunity to liquidate a part of their holdings.
Along with advantages, there are also disadvantages a company may face when issuing an IPO. First and foremost, there is loss of control, as with the entrance in the market, the number of shareholders increases. It means the founders and first equity holders lose control over the company. Going public, in other words, means selling ownership to other people outside the company. And once the ownership rights are shared within other individuals, it means the sole shareholder is no longer under control to make decisions autonomously.
Due to federal law, there are also put restrictions on board to ensure its complete independence from inside of the company. Next, as the company goes bigger and releases IPO, the costs also increase. As your company goes public, the regulations become stricter and place your company under the supervision of the Securities and Exchange Commission. Accordingly, your company incurs costs, which may not have incurred before. Typical expenses include issuing costs, auditing costs as well as other market information costs.
Once your company goes public, the reporting requirements also change. It means you must make extensive quarterly as well as annual disclosures about the operational, financial and other internal matters. By reporting such matters, you ensure complete transparency among the firm and the public so they are sure what they are putting their money into.
Overall, releasing IPO is a massive undertaking a business can go through. By successfully taking this step, it will be the key to dramatically increasing the company’s potential for growth. Note that staging an IPO is very time-consuming as well as an expensive process. The issuing time may start from 6 months to 2 years, noting the complexity of business and the volume of shares. From both companies’ and investors’ side issuing and investing in an initial public offering is a very long and detailed process. Companies need to understand the costs and benefits it will bring to their business, whether it is in line with their vision or not. Investors on the other side need to cautiously understand the structure and objectives of the business and whether it is beneficial to invest in that company or not.