An initial public offering (IPO) is when a private company publicly offers securities for the first time.
Overview
Prior to conducting an IPO, a company is considered private, meaning it does not need to disclose information on its operations but faces restrictions on whom it can sell its securities to. Private companies may sell securities in private placements but cannot sell securities on public exchanges (e.g. through the NYSE), limiting their ability to raise capital. A company sells securities to public investors by conducting an initial public offering, which makes them a public company. Once public, the company must file periodic reports with the Securities and Exchange Commission (SEC).
IPO Process
To prevent securities fraud, the Securities Act and SEC Rules regulate the IPO Process. Section 5 of the Securities Act prevents the sale of any security unless the issuer files a registration statement and regulates the issuers’ ability to offer any security for sale before filing a registration statement.
The primary event in an IPO is when the issuer files a Form S-1, which is the most common registration statement used for IPOs. The registration statement contains the bulk of the quantitative and qualitative disclosures to investors.
Section 5 and SEC rules strictly regulate when and how the issuer can communicate with and act towards investors prior to SEC review, in what is known as gun-jumping. Prior to filing a Form S-1, the issuer is in the pre-filing period. During this time, Section 5(c) prohibits the issuer from making any “offer” to sell securities, and Section 2(a)(3) defines “offer” as all communications that may condition the market for the sale of the securities. During this time issuers begin consulting underwriters to market the IPO, law firms to manage the drafting and filing of SEC documents, and accounting firms to audit their financial documents.
Once the issuer files the S-1, they are in the waiting period. During the waiting period, the issuer and underwriter begin to gauge market interest and the SEC reviews the S-1. Section 5 of the Securities Act allows the issuer to make offers to sell their security under certain conditions. Section 5(b)(1) allows oral offers, and companies often conduct roadshows during this time. For essentially all written offers, however, Section 5(b)(1) requires that written offers satisfy Section 10, which regulates what information prospectuses must contain.
Once the SEC approves the issuer’s S-1, then they are in the post-effective period and may sell their security without restriction.