What Is Involved in an IPO Application?

Geri Terzo

Selling equity shares in the capital markets is one way for companies to raise money for future plans. An initial public offering (IPO) is a new stock that is entering the financial markets, and it allows investors to begin trading shares. There is a great degree of financial and organizational preparation that goes into a new issue, and an IPO application, also known as registration, is a major part of that process. In the U.S., an IPO application is filed with the U.S. Securities and Exchange Commission, and a company must also meet requirements established by the exchange where shares will be traded.

Woman holding a book
Woman holding a book

Initially, after an IPO application has been filed with a regulatory agency, that governing body should respond to the company within approximately one month's time. In its response, the agency might have questions about the business, future profit expectations, or the financial health of the company. Regulators might ask for further elaboration on any of the sections in the IPO application. The issuing company then must respond to the query and provide the missing or requested information. Once the form is refiled, the regulatory agency may come back with additional questions, and the process may continue on for months.

An IPO is a process led by a company's top management team, including a chief executive officer and a chief financial officer in addition to investment bankers. Together, these teams decide how much money an IPO might be worth and how many new shares to list in the public markets for investors to trade. A trading range is established suggesting how much money each individual new share will be worth on the day of the IPO. The timing of the IPO is also decided.

New issues that will trade on some formal exchange, such as the New York Stock Exchange in the U.S. or the London Stock Exchange in the U.K., must meet specific exchange requirements as well. Typically, if a regulatory body is satisfied with a company's IPO application, the exchange will support the filing, too, considering the exchange rules are similarly met. For instance, a stock price must begin trading at some minimum value in order to trade on a major exchange.

A company also has the option to delay a new issue, although it costs a company to have an outstanding application with regulators. If, for instance, economic conditions change or a company faces some unexpected financial challenge, it might be prudent to postpone the issuance of shares to the public until circumstances or expectations improve. That filing can remain active until a company decides to cancel an IPO application altogether.

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