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Initial Public Offering (IPO)

If you own a company or know someone who does, it is important to know what a business can do in order to get funding. One viable option is the Initial Public Offering.

IPO is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it is known as an IPO.

 

Companies could fall into two broad categories:

 

 

 

 

 

 

 

 

 

 

  • Private: Are those that have few shareholders and its owners do not have to disclose much information about the company. Most small businesses are held privately. But large companies can be private too, such as: IKEA, Domino's Pizza and Hallmark.

 

  • Public: These have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public." Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter.

 

 

 

There are some benefits and some drawbacks of going public.

 

 

Upsides of Going Public

 

  • There are more money available to make grow the business, with an extra infusion of cash derived from the sale of the stock or by issuing a bond, the company may grow its business without having to borrow from traditional sources.

 

  • Stock options may be used in an effective incentive program. Stocks and options are an attractive incentive when recruiting talented senior management personnel. For employees, it could be an effective means of increasing productivity.

 

  • A publicly traded company conveys a positive image (if business goes well) and attracts high-quality personnel at all levels, including senior management.

 

Downsides of Going Public

 

  • Loss of privacy: Once a company goes public, its finances and almost everything about it, including its business operations is open to government and public scrutiny. Company finances and other business data are available to the public, and can sometimes work against company interests.

 

  • Company is subject to regulations: The Company is subject to SEC (Security Exchange Commission) oversight and regulations, including strict disclosure requirements. Lawsuits may be based on allegations of self-trading or insider trading.

 

  • Costly procedure: Preparation for the IPO is expensive, complex and time consuming. As much as a year or more may be required to prepare for an IPO. During this period, business and market conditions can change radically, and it may not be a propitious time for an IPO.

 

 

 

By: Diana Stacey Bravo

 

 

 

 

 

 

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