What is IPO?

An initial public offering (IPO) is the first sale of a corporation common share to investors on a public stock exchange. The main purpose of an IPO is to raise capital for the corporation. While IPOs are effective at raising capital, being listed on a stock exchange imposes heavy regulatory compliance and reporting requirements. The term only refers to the first public issuance of a company's shares. If a company later sells newly issued shares (again) to the market, it is called a 'Seasoned Equity Offering'. When a shareholder sells shares it is called a "secondary offering" and the shareholder, not the company who originally issued the shares, retains the proceeds of the offering. These terms are often confused. In distinguishing them, it is important to remember that only a company which issues shares can make a "primary offering". Secondary offerings occur on the "secondary market", where shareholders (not the issuing company) buy and sell shares with each other.

IPOs generally involve one or more investment banks as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

The sale (that is, the allocation and pricing) of shares in an IPO may take several forms. Common methods include:

• Dutch auction
  
• Firm commitment
  
• Best efforts
  
• Bought deal
  
• Self Distribution of Stock

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold. Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions—up to 8% in some cases.

After the newly public company has its IPO, it enters a "quiet period." During this time, the insiders, and any underwriters involved in the IPO, are restricted from issuing any earnings forecasts or research reports for the company. The quiet period is in effect for 40 calendar days following the first trading day. Regulatory changes by the United States Securities and Exchange Commission, changed the quiet period of 25 days, to 40 days on July 9, 2002. When the quiet period is over, generally the lead underwriters will initiate research coverage on the firm.