What is an IPO, in plain words?Easy

A company sells shares to the public for the first time — and the reason it takes months is not the selling, it is the document.

2 min read · 450 words

An initial public offering is the first time a company's shares can be bought by anybody, on an exchange, at a price the market sets. Before it, the shares exist but change hands rarely and by private agreement.

Who is selling, and where the money goes

This is the part most coverage blurs, and it is the most useful thing to know.

• Primary shares are new. The company creates and sells them, and the money goes to the company. Existing holders own a smaller share of a company with more cash in it — that is dilution.
• Secondary shares are existing ones. A founder or an early investor is selling their own shares, and the money goes to them. The company receives nothing and nothing is diluted.

Most offerings are a mixture, and the announcement gives both numbers. A deal that is mostly secondary is holders selling down; a deal that is mostly primary is a company raising money. The calculator on the ECM desk splits the headline figure into the two.

Why it takes months

Not because of the selling. Because of the prospectus — a document that must describe the business, its risks and its accounts, and that anybody who buys can later sue on. Preparing it involves auditors, lawyers and a regulator, and it is the timetable.

Everything else — the meetings with investors, the book, the pricing — happens in the last two or three weeks.

How the price is decided

A range is published, investors say how much they would buy and at what price, and the final number is set the night before trading starts. That is bookbuilding, and it is a survey rather than an auction: the bank chooses who gets shares, which is why an order is not the same as an allocation.

The price is normally set a little below where the shares are expected to trade. That is on purpose, and the page on IPOs explains what the company is buying with the difference.

What changes for the company, permanently

• It must publish results on a schedule and release price-sensitive information promptly.
• It has independent directors, an audit committee and a published remuneration policy.
• Anybody can buy the shares, including people the founders would not have chosen.
• Its price is now a public number that moves daily and that employees, customers and journalists can all see.

The alternatives

A direct listing puts the shares on an exchange without selling new ones and without a bank building a book. A de-SPAC merges the company into one that is already listed. Both reach a public market; they differ in what has to be disclosed, when, and who gets paid along the way.