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Home » FAQ » IPOs


What is a Public Offering?

A new issue of securities or initial public offering (IPO), such as shares, options, convertible notes or various other instruments, may be made to raise funds for the company to use as working capital or for a specific project. After an IPO, a company may still find the need to raise additional cash and may choose to have a secondary public offering. These securities are issued in the primary market, and it is the official quotation of securities for trading by the public (known as the secondary market), which completes the process of flotation.

How are funds raised?

New issues to raise funds may be made by the following methods:
  • an offer to the public and existing shareholders
  • a placement to institutions
  • a pro rata non-renounceable offer to shareholders
  • a pro rata renounceable offer to shareholders
  • as well as various other instruments
Underwriting the issue

Underwriters are hired by companies to help them issue new stock to the public. Underwriters play a critical role in this process. Firstly, they provide the company with procedural and financial advice, they then buy the issue, and finally resell it to the public.

By having an issue underwritten the company is guaranteed the funds sought will be:
  • raised, as any shortfall will be taken up by the underwriter, on agreed terms and conditions (subject to the clauses in the underwriting agreement); and
  • available at a specified time
Underwriters receive a fee for this guarantee.

NOTE: Not all IPOs are underwritten. Sometimes a company may decide that an underwriter is not necessary as the terms and conditions of the offer are sufficiently attractive to render the possibility of a shortfall negligible. A Company may evaluate the desirability of having an issue underwritten in the terms of whether the guarantee of a successful issue justifies the additional costs.

How are public offering shares sold?

Shares are offered via a prospectus. The prospectus is a document by which a company offers its securities to the public. As it provides the primary source of information on which potential investors rely in assessing the merits of a company, great care must be taken to ensure that all relevant information is included and the contents are entirely factual with no material omissions.

To protect investors the Australian Securities and Investments Commission (ASIC) requires that a prospectus must be lodged and registered before any invitations or offers for subscription or purchase of securities is made. Under the Corporations Law, a prospectus must contain all the information investors and professional advisers would reasonably require and reasonably expect to find to make an informed assessment of the assets, liabilities, financial position, profits, losses and prospects of the company and the rights attached to the securities.

Generally, the underwriter or corporate adviser will price the issue at a discount to the expected market valuation for the company. This is to allow for some appreciation in the share price after listing, thereby assisting public acceptance of the stock on the secondary market. It also helps ensure the minimum subscription under the prospectus is reached.

Considerations of an IPO

The decision to take a company public in the form of an initial public offering (IPO) should not be considered lightly. There are several advantages and disadvantages to being a public company, which should thoroughly be considered.


Increased Capital. A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment.

Liquidity. Once shares of a company are traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence.

Increased Prestige. Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital.

Valuation. Public trading of a company's shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator. This is helpful for a company that is looking for a merger or acquisition. It also allows the shareholders to know the value of the shares.

Increased wealth. The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public, subject to limitations of federal and state securities laws.


Time and Expense. Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys, accountants, and printers. In addition, the underwriter's fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing the IPO.

Disclosure. Once a company is a reporting company it must provide information regarding compensation of senior management, transactions with parties related to the company, conflicts of interest, competitive positions, how the company intends to develop future products, material contracts, and lawsuits. In addition, once the offering statement is effective, a company will be required to make financial disclosures. Public companies are required to file quarterly statements containing unaudited financial statements and audited financial statements annually. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements. In addition, a company must report certain material events as they arise. This information is available to investors, employees, and competitors.

Decisions based upon Stock Price. Management's decisions may be effected by the market price of the shares and the feeling that they must get market recognition for the company's stock.

Regulatory Review. The Company will be open to review by ASIC to ensure that the company is making the appropriate filings with all relevant disclosures.

Falling Stock Price. If the shares of the company's stock fall, the company may lose market confidence, decreased valuation of the company may effect lines of credits, secondary offering pricing, the company's ability to maintain employees, and the personal wealth of insiders and investors.

Vulnerablility. If a large portion of the company's shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming.

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