Definition: Initial Public Offering
An Initial Public Offering, what is commonly called an "IPO", is the first sale of a privately-held company's stock to the public market, via a stock exchange. The main reason for an IPO is to raise money, or capital, for the corporation. The term IPO is only used for the first public issuance of stock and is made in the primary market; any additionally issuance of stock would be called a “Secondary Market Offering.”
Stock traded on an exchange brings a number of reporting and compliance issues that all public companies must follow, and could involve a considerable expense (see: Sarbanes-Oxley Act of 2002).
An IPO usually involves a number of investment banks to act as underwriters. A large IPO is underwritten by a “syndicate” of investment banks, led by one or more banks called the "lead underwriter(s)." The company having the initial offering is called the "issuer" and signs a contract with the main underwriter to sell shares to the public. Depending on the demand of IPO, the issuer could call for an "over-allotment option," allowing the underwriters to increase the amount of shares in the initial offer by a certain amount.
The sale of an IPO could occur in different ways (ie: Firm Commitment, Dutch Auction, Best Efforts, Bought Deal, Self Distribution). The price of the stock will either be pre-determined or determined by an auction process. Upon selling shares to the public, the underwriters charge a fee, or commission, whose costs usually vary from deal to deal. Depending on a persons affiliation with the company's IPO, (typically an employee, manager, board member or founding member) they may have a holding period or lockout period placed on the stock, which restricts them from selling shares before a certain time period.
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