In an in-depth guide of Merger and Acquisition, I said that the primary aim of any business entity is growth and expansion.

There are several ways through which you can grow your company.

Apart from merger and acquisition, you may also grow your company by offering its share/stock to the public.

When your company wish to offer its shares to the general public it must pass through the legal process called Initial Public Offering (IPO)

If your thirst is to understand IPO, Relax! Here you will find everything you need to know about IPO to quench your thirst.

Here you will learn






    Now let’s start

     Initial Public Offering: Everything you need to know with vivid examples

    What is an Initial Public Offering?

    Initial Public Offering represents the first issue of the securities of a company to the public. 

    It is an act where a company is offering its stock on a public stock exchange for the first time.



    Further IPO entails the legal processes through which a private company becomes a public company by offering its shares to the public.

    In IPO the company which offer its share to the public it’s called Issuer


    Purpose of an initial public offering


    The main purpose of the IPO is to raise capital through letting other investors invest their money into the company in exchange with dividends.

    How IPO works?


    Well! IPO works as a legal means to validate the company to operate as a public company.

    You must note that the law does not allow private companies to issue shares to the general public. Only a public company is allowed to do so.

    Thus, whenever the company is converting from a private company to public company it must do IPO to validate their conversion.  

    Alternatively, a company may wish to start as a public company from the beginning (which is very rare). To legally operate as a public company it must do IPO.

    Consider the following example to have a better understanding of how IPO works.

    Assume A and B Co. Ltd operates as a private company.  Later on, they find the need to expand their entity thus they choose to convert to a public company.  Among other things, before starting to operate as a public company they must do IPO to comply with the legal requirements of a public company.

    IPO Versus Going Public

    Going Public is a term that is also commonly used to refer to the IPO Process. Once going public, the company’s shares may later be listed at a Stock Exchange.

    The first company in world history to do IPO and become a public company formally listed in the stock exchange is the Dutch East India Company in March 1602 

    According to the Museum of American finance, the first IPO in The US was the public offering of Bank of North America around 1783.

    The largest IPOs in the world


    Currently, there are 11 IPOs which are reported by the different source to be largest IPOs (basing on the money raised) in the world

    S.N
    COMPANY
    IPO YEAR
    AMOUNT
    RAISED
    01
    Saudi Aramco
    2019
    $29.4B
    02
    The Alibaba Group
    2014
    $25B
    03
    SoftBank Group
    2018
    $23.5B
    04
    Agricultural Bank of China
    2010
    $22.1B
    05
    Industrial and Commercial Bank of China
    2006
    $21.9B
    06
    American International Assurance
    2010
    $20.5B
    07
    Visa Inc.
    2008
    $19.7B
    08
    General Motors
    2010
    $18.15B
    09
    NTT DoCoMo
    1998
    $18.05B
    10
    Enel
    1999
    $16.59B
    11
    Facebook
    2012
    $16.01B

    Source: Wikipedia

    IPO Team


    The process of going public is thus a landmark transformation for any company.

    Most of our companies at present are private companies, while some of them are statutory corporate bodies.

    Hence, where such an entity decides to go public, it undergoes a momentous process of change in which it transforms itself in a variety of ways.

    This requires the involvement of a range of actors and professionals.

    The following diagram will help illustrate this point:




    IPO team




    Why lawyers are necessary for IPO

    The need for involving a lawyer in the process of going public is both a statutory requirement as well as a practical necessity.

    Example in Tanzania the Capital Markets and Securities (Prospectus Requirements) Regulations, 1997, specify, among other things, the information required to be included in the prospectus.

    This information includes an item called “Legal Opinion” which contains statements that, by law, must be given by a person qualified to practice law in Tanzania. 

    On the other hand, there are practical reasons for having a lawyer involved in the IPO process.

    The mere fact that the process involves a legal transformation necessarily implies the operation of legal rules.

    Like in any other important transaction in the world of business today, conditions exist that creates demand for a person learned and experienced in the application of legal principles and in handling complex legal issues.

    Hence, a company intending to go the public cannot do so without the aid of a legally trained mind.

    Apart from the legal requirement, the nature of the work to be performed necessitates the lawyer’s involvement as can be seen in the following diagram:
    Role of Lawyers in IPO




    Role of lawyers in IPO

    Generally, lawyers play the following role when it comes to IPO.

    1. To ensure that the issuing company is duly constituted as a public company:
    • Minimum amber of shareholders
    • Free transferability of shares
    • Absence of exemption rights
    • Invitation to the public to subscribe is not prohibited.


    2. To ensure that the necessary authorization to go public have been obtained
    • Government authorization


    3. To ensure that the company is in compliance with various legislations.
    • Licenses
    • Insurance covers
    • Specific legislation
    • Registrations (if any)


    4. To deal with any litigations which pose a threat to the company’s revenue

    5. Authentication of documents

    6. To deal with the stricture of shareholding
    • Ordinary shares
    • Preference shares


    7. Preparation of various Agreements for the company such as underwriting agreements (if any); engagement of other employees etc

    8. To conduct due diligence to expose the risks, strength, and weaknesses of the company

    9. To prepare Declaration by Directors – statement

    10. To educate the directors on the code of conduct of directors of listed companies

    Initial Public Offering Process


    The I.P.O process involves a variety of technical sub-processes that make it possible for a company’s shares to be offered to the public through a primary market and later on “listed” on the Stock Exchange.

    IPO processes are governing and regulated by different laws and authorities in different countries.


    Example in Tanzania IPO processes is governed by The Companies Act, the Capital Markets and Securities & Regulations,Capital Markets and Securities Authority (CMSA)Dar es Salaam Stock Exchange (DSE), etc.

    In USA IPO processes are governed and regulated by the Securities’ Act and United States Securities and Exchange Commission

    Together with those laws and authority, the following are the main processes/stages of IPO in the world.
    • Planning
    • Implementation
    • Closing


    Planning

    Planning is the foundation of a successful IPO. It is the first step in the IPO processes here is where everything is laid down.

    The following are the main activities involved in the planning stage.

    • Passing of all necessary corporate resolutions including the resolution to convert the company from private to public company



    • Finding IPO actors and building an IPO team.  The IPO team must include underwriter, lawyer, Certified Accountant, and other actors as seen above.



    NB. The underwriter is an investment bank duly registered with relevant authorities, this bank works together with the issuer to determine the Initial share price and it buys the shares and sells them to potential investors.

    Example if the issuer offers 2,000 worth $20 per share. Underwriter once agreed, may buy those shares for 18 and sell them to the public for $20.

    • Preparing all necessary documents including Prospectus or offering documents, various agreements between issuer and actors together with other required formal statements.



    • Conducting Due Diligence. This is the activity that requires attention and intensive work. Here every actor must do everything to make sure that the company is ready for IPO.



    For example, the lawyer must examine all the legal issues about the company. 

    These include the company’s existence as a legal person, its corporate structure, its business and the legal framework in which it operates, properties (both movable and immovable), patents, trademarks, major contractual relations, labor and matters relating to the environment.

    On the other hand, underwriter and issuer must conduct a thorough valuation to determine the share price.

    Implementation

    This is the second crucial stage. It is where the real IPO happens. This is where things are moved from the background to the foreground.  

    The following activities involve

    • Getting approval from relevant authorities
    • The underwriter and issuer agree on the opening and closing date of IPO, amount of share to be offered and initial price of the shares.



    The initial share price is usually determined by looking at the goals of issuing company, reputation, and economy status at the time of issuing.

    • Going Public. 
    Once everything is done then IPO is live. It is generally advertised in all media to attract more investors. During this time the emphasis is on the deadline. However, it is possible to extend the IPO period.

    Closing

    Closing of an initial public offering means the date on which the sale and purchase of the shares of Common Stock sold in the Public Offering is elapsed.

    It is followed by a transition to the market competition period. This period starts 25 days after IPO. Here everything if off the underwriter hands and analysis is based on the public views and market competition.

    Underwriter may conduct post-IPO valuation and deliver it to the company Also underwriter becomes the advisor when the share price swings.
      

    Initial Public Offering Advantages

    The following are the advantages of IPO
    • Raises capital and allow expansion
    • Listed on Stock exchange


    Raise Capital and allow expansion

    Raise capital is the main advantage of IPO. Through going to the public, a company can get new investors who are willing to invest their money into the company. 

    The money invested enhances the expansion of a company.
    Through IPO a company may raise enough money to increase its share capital, pay off debt, expand its infrastructure etc.

    Listed on Stock exchange

    Listed on the Stock exchange is a prestige. After going public, a company may be listed on the stock exchange thing which allows the company to trade its share in the stock market and attracts new investors regularly.

    This increase the company’s ability to raise a large amount of money from the market place

    Initial Public Offering Shortcomings

    The following are the disadvantage of IPO
    • Complex
    • Risky
    • Time-consuming
    • Cost
    • Loss of privacy


    Complex
    One of the highly complex legal processes is IP. It involves a lot of technical issues and formalities like researching and due diligence, registration, preparation of all required documents, licensing and approval, etc.

    The IPO team must comply with everything to validate the deal. Otherwise, they can’t make it.

    Risky

    IPO is risky. Sometimes a company may not reach the targeted amount of money to be raised. This may happen due to several factors including the issuer’s bad reputation and questionable goodwill, economic depression, and force majure.

    IPO may cause a lot of distraction to the key leader in issuing the company in a management role. They may highly focus on IPO instead of management. This distraction may hurt profit.

    Time-consuming

    IPO processes take a long time to complete. It requires a lot of pulling and pushing to make things happen. Most of the issues in IPO are technical and takes time to complete.

    Cost

    It needs a lot of money and resources to go public. Money to hire professional, money to pay required fees, money for IPO marketing and ‘IPO roadshow’

     Loss of privacy

    IPO requires an issuer to disclose some of the financial and business information to the public. The dissemination of this information may be useful to your supplier, customers, and competitors.

    Initial public offering versus secondary offering

    The major different between IPO and secondary offering is that IPO is when the company is offering its share to the public at the very first time while any other offering which will ‘follow-on’ after the IPO is called secondary offering or follow-on offerings or follow-on public offers (FPOs).

    Conclusion
    In this article, I have endeavored to explain every basic element of Initial Public Offering.

    The bottom line is

    • IPO entails the legal processes through which private company becomes a public company by offering its shares to the public.
    • The main purpose of an IPO is to raise capital.
    • IPO works as a legal means to validate the company to operate as a public company.
    • That  the primary role of lawyers in IPO is to ensure that the process is done strictly within the law.
    • The processes of IPO are passing through planning, implementation, and closing stages.
    • Advantages of IPO include. It raises capital and it enables a company to be listed on the stock exchange.
    • Disadvantages of IPO include risky, time-consuming, cost, loss of privacy, and complex.
    Hope you find this article useful. Kindly spread the knowledge by sharing this post.

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