What is an IPO (Initial Public Offering)?
Acronym for Initial Public Offering, The meaning of IPO can be translated as initial public offering. It is a procedure through which a company starts to have its shares traded on the stock exchange . This process is also known as IPO. In this article we will give you the definition of Initial public offering.
In addition to companies, real estate investment funds (FIIs) also carry out IPOs, as their shares are traded on the stock exchange. However, to facilitate the understanding of the topic, this article focuses on stock IPO.
What is the purpose of the IPO?
The main purpose of an IPO is to make a company go public, which will then have its shares traded on the stock exchange. However, the process also involves other objectives and benefits that can be enjoyed by both the company and investors.
Profit for shareholders
One of the interesting aspects about the IPO is that it can help the partners obtain more significant profits with the company. In practice, those who hold a stake in the company may have gains from the IPO, especially if the shares undergo appreciation.
After all, the partners are like original shareholders and start to hold part of the company’s shares. With the stock market debut and potential trading price growth, it is possible to benefit from the movement and earn returns.
An example of this effect can be found in Jeff Bezos, founder of Amazon and the richest man in the world in 2021, as listed by Forbes. A significant part of his fortune derives from the amount of shares he owns in Amazon, which has become one of the biggest companies in the world.
Increase in liquidity
More than generating profits for those who participate in the business, the IPO serves to increase liquidity in relation to equity. From stock trading, it becomes easier to trade the stake in the company, converting it into cash.
Furthermore, liquidity works as an element of attraction for other interested parties. The greater the trading volume of securities on the stock exchange, the greater the interest of investors. The process also enables the divestment of strategic investors.
More visibility for the business
Image improvement can also be among the goals of a company that decides to go public. The idea is to get more exposure for the brand and thus attract more interested parties. It can also be a way to consolidate in the market or to differentiate yourself from competitors.
The reason for this is the fact that the share offering is public. As communication takes place in a broad way, it can be a solution for the business that wants to have exposure to the entire financial market.
Depending on the performance on the market debut, the process can also help to improve brand awareness. As a result, the company can achieve more favorable results for the company over time.
Possibility of business expansion
Another interesting point is the expansion of the company, which now has shares traded on the stock exchange. Thus, improving the image and increasing visibility are complementary criteria that help to achieve this objective.
However, the main factor for expansion involves fundraising. Through the IPO, the company obtains funds that can be used in various operations, such as debt repayment, cash reinforcement or project financing.
All of this happens through the transfer of part of the business to shareholders and can be decisive for the continuity or evolution of the business.
As you will see below, a company must go through a long process of adapting to the transparency and governance criteria of the stock exchange before the IPO. This is important so that investors can make qualified analyzes to support decisions on investments.
Although this requires preparation and investments on the part of the company, it can generate positive effects in relation to governance. This is because the business will have a structure that can be more easily controllable.
Also, it will bring more transparency at all levels of the organization. As a consequence, it can help to achieve and maintain positive results.
Prospecting qualified professionals
The motive involves offering shares in the company as part of the payment or as a performance bonus. If the business has good growth potential and uses the shares as benefits, it is possible that more qualified professionals will want to fill the vacancies.
This helps to reduce the time to fill positions, favors the increase of the permanence of professionals and stimulates the improvement in performance. As a consequence, the tendency is to create a positive performance cycle for the company.
How does the IPO work?
In terms of operation, the IPO is a process that consists of several steps. In practice, he foresees the transformation of the business at certain points so that it becomes more aligned with the requirements for trading on the stock exchange.
Once the bureaucratic procedures are completed, the IPO itself leads to the company’s first share trading on the stock exchange. Therefore, it works on the basis of changing the structure of social capital, making it open.
What are the types of IPO?
Although every IPO corresponds to the availability of shares in companies for sale, there are other public offerings that can happen. However, they are not classified as IPOs. To better understand this dynamic, it is important to understand what primary and secondary offers are.
A primary offering takes place whenever the company issues the shares and launches them on the market. When it’s the first deal, it’s the IPO. However, there can also be a primary follow-on. In this case, the company issues new shares on the market, increasing the shareholder base.
On the other hand, there are also secondary equity offerings. They happen when a partner decides to sell its market share, expanding the number of assets available on the stock exchange. So, the money does not go to the company’s cash, but to the partner who disposes of the stake.
After understanding the definition of Initial public offering below are the steps of IPO.
What are the IPO steps?
For the IPO to take place, the company interested in carrying it out needs to go through a long process, which can take several months, even exceeding a year. The entire procedure also involves costs, from operating fees to payment of fees and commissions.
Want to better understand the whole process? See what are the main points of an IPO and learn how a company prepares to enter the stock market!
Due to the complexity of the stock IPO, companies need to have a complete plan on how to execute each step. Therefore, everything starts with an internal planning regarding the procedure, which usually involves the definition of a team responsible for the task.
At that moment, costs and requirements are raised, so that the company can adapt. After all, to make the opening viable, it may be necessary to carry out operational changes or governance adaptations, for example.
A relevant phase of IPO and ongoing trading on the stock exchange is the disclosure of financial data. They will serve as a basis for investors to evaluate the opportunity. Therefore, the information must be completely reliable.
In view of this, the company must carry out a complete survey of data and carry out audits. In this sense, an external and independent team will be able to identify possible flaws or fraud in the balance sheets. She is also responsible for attesting that everything is presented correctly.
This validation step does not only occur at the beginning of the process. It can also be done in periods closer to the premiere.
Presentation to the market
As a way to arouse interest in the market, the company should make a presentation of the investment opportunity. This often happens with institutional investors, such as investment funds or clubs.
In this case, the company and its results are presented to investors with the support of the financial institution that helps the business in this process. It is also common for executives, directors and/or the president of the company to be present at the meetings.
Registration with the CVM
Regarding bureaucratic issues, one of the most important steps is registration with the Securities and Exchange Commission (CVM). It is up to the company to register as a publicly-held company, as this will allow it to have its shares traded on the stock exchange.
Therefore, for the process to be possible, it is essential that the company observes the rules of the regulatory body, such as submission of complete documentation.
Listing on B3
Another bureaucratic step is the listing of the company on the stock exchange, B3. Without this step, there is no trading of shares on the trading floor, even if there is registration with the CVM. This step also requires the presentation of various documents, which follow the governance level of the business.
At this point, it is up to the company to choose which listing level it wants to participate. Novo Mercado is the highest level and makes more intense demands in relation to corporate governance.
In addition to disclosing more information, the company must also stick to common stock , not trading preferred stock. However, there are other levels, each of which has its own requirements.
Disclosure of prospectus
The next essential step for the IPO is the disclosure of the prospectus. This is a document that serves as a proposal. To do so, it must present the conditions of the investment, so that investors can make analyzes for decision making.
At this stage of the IPO, the preliminary prospectus and then the definitive one are released. They bring business and investment information, indicating how the resources will be used. Therefore, documents act as transparency tools.
Communication to the market
As the IPO is a public offering, it is mandatory that the entire market knows about the opportunity. Therefore, there is communication to the market, which serves as a warning about the IPO process.
In addition to being mandatory for the process, the step can help to foster market interest and attract more investors.
After the market is communicated, the reservation period begins. This step is intended for non-institutional investors, so they can define how many shares they want to acquire. This process is carried out at the investor’s financial institution.
Normally, if the number of shares reserved is less than the total available, the IPO is suspended. When demand is greater than supply, on the other hand, a calculation is made to redistribute the shares, according to the interest shown by investors.
Bookbuilding, on the other hand, is the stage of building the sale price of shares at the time of debut. It usually occurs alongside the reserve period, but involves the price that investors say they are willing to pay.
This process helps the company understand how the market perceives the opportunity, which guides the choice of an amount considered attractive. However, investors who are willing to pay a lower price than the one actually charged will be excluded from the IPO.
debut on the stock market
Once all the steps are completed, the company is ready to become a publicly traded company. This officially happens on the day the IPO takes place on the stock exchange.
On the scheduled date, the first sale of the company’s shares takes place in this trading environment. The investors who made the reservation make the purchase and, if the prospectus allows, they can sell them on the same day to other interested parties.
From then on, the company becomes part of the trading sessions of the stock exchange. This means that the papers will integrate the secondary market, that is, they will be traded among investors, without raising funds for the company.
We hope that you have understood the definition of Initial public offering.