Definition
An IPO is the process by which a private company offers shares to the public for the first time and lists them on a stock exchange, transforming it into a publicly traded company.
IPO Process – Step by Step
| Step | Process | Key Details |
|---|---|---|
| 1 | Mandate & Due Diligence | Company hires investment banks (bookrunners); legal, financial, and business due diligence performed. |
| 2 | Draft Prospectus / Registration | Filed with regulator (e.g., SEC Form S-1); includes financials, risks, use of proceeds. |
| 3 | Bookbuilding & Roadshow | Marketing to institutional investors to gauge demand and determine a price range. |
| 4 | Pricing & Allocation | Final offer price is set based on demand from the bookbuilding process. |
| 5 | Listing & Trading | Shares are listed on an exchange (e.g., NYSE, NASDAQ) and public trading begins. |
| 6 | Post-IPO Stabilization | The bank may support the price via a greenshoe option; a lock-up period prevents insider selling. |
Example – Airbnb IPO (2020)
Airbnb raised approximately $3.5 billion. Its initial price range was $44–$50, but due to high demand, it was priced at $68 per share and listed on Nasdaq under the ticker ABNB.
Key IPO Concepts
- Bookbuilding: The process where investment banks collect demand indications from institutional investors to determine the final offer price.
- Underwriting: An arrangement where banks guarantee to buy any unsold shares (firm commitment) or simply sell what they can (best efforts).
- Greenshoe Option: An overallotment option (typically 15%) that allows underwriters to sell extra shares if demand is strong and helps stabilize the price post-listing.
- Lock-up Period: A period (typically 90–180 days) during which company insiders are not allowed to sell their shares after the IPO.
Definition
A follow-on offering is when a publicly listed company issues additional shares after its IPO to raise more capital or provide liquidity for existing shareholders.
Types of Offerings
| Type | Description |
|---|---|
| Primary Offering | The company issues new shares, and the proceeds go to the company (e.g., to fund expansion). |
| Secondary Offering | Existing shareholders (like founders or venture capitalists) sell their own shares, and the proceeds go to them. |
| Mixed Offering | A combination of both a primary and secondary offering. |
Mechanisms
- Block Trade: A large, pre-arranged sale of shares by an existing holder, often sold at a discount to the market price.
- Accelerated Bookbuild (ABB): A rapid share sale (typically within 24-48 hours) that is marketed only to institutional investors.
Example – Tesla Follow-On (2020)
Tesla issued approximately $5 billion in new shares to fund its expansion plans. The shares were sold to investors via an accelerated bookbuild.
Private Placement
Shares are sold directly to a select group of institutional or accredited investors without a public offering. This is faster and cheaper but the shares are usually illiquid and may be sold at a discount.
PIPE (Private Investment in Public Equity)
A public company issues shares to private investors, often below the current market price, to raise capital quickly.
Example
A biotech company raises $200 million from a group of hedge funds in a PIPE transaction to get immediate funding for its research and development pipeline.
Rights Issue
A company offers new shares to its existing shareholders at a discount, usually in proportion to their current holdings, to protect them from dilution.
Mechanism
Shareholders receive "rights" which they can either exercise (to buy the new shares), sell on the open market, or let expire.
Example
A company announces a 1-for-4 rights issue at $10 when the current market price is $15. This allows a shareholder to buy one new share for every four they currently hold.
Standby Underwriting
An underwriter agrees to purchase any unsubscribed shares in a rights issue, guaranteeing that the company will raise its target amount of capital.
Definition
A SPAC is a “blank check” company formed to raise money via an IPO with the sole purpose of acquiring a private company and taking it public, typically within 18-24 months.
Lifecycle
- Formation & IPO: The SPAC raises capital from the public.
- Trust Account: The IPO proceeds are held in escrow.
- Target Search & Merger: The SPAC finds a private company and merges with it (the "de-SPAC" transaction).
- Public Listing: The target company becomes a publicly listed entity.
Why SPACs matter: They offer a faster path to the public markets compared to a traditional IPO, but are often more dilutive and face increasing regulatory scrutiny.
Definition
These are debt or hybrid instruments that can be converted into equity. They are often used as a cheaper way for companies to raise capital.
Types
- Convertible Bonds: Bonds that can be converted into a fixed number of shares at a predetermined price.
- Mandatory Convertibles: Securities that automatically convert into shares at maturity.
- Equity-Linked Notes: Structured products with returns tied to the performance of a company's stock.
Example
A company issues $500 million in convertible bonds. The bonds are convertible into shares at a price of $50 per share, while the current stock price is $40. If the stock price rises above $50, investors will likely convert their bonds into shares.
Quick Comparison Table
| Method | Public? | Investors | Key Benefit | Key Risk |
|---|---|---|---|---|
| IPO | Yes | Public market | Large capital raise, liquidity | Expensive, regulatory burden |
| Follow-On | Yes | Public | Quick raise post-IPO | Dilution |
| PIPE | No | Institutional | Fast, flexible | Illiquidity, discount |
| Rights Issue | Yes | Existing holders | Protects from dilution | Under-subscribed risk |
| SPAC | Yes | Public → Private merge | Speed, flexibility | Dilution, regulatory risk |
| Convertible | Mixed | Institutional | Cheaper capital, upside | Dilution, complexity |
Final Interview Tips
Always be ready to describe the bookbuilding process for an IPO, explain the difference between primary and secondary shares in a follow-on offering, and understand the mechanics of a SPAC and a rights issue.