What Is Involved in Filing an IPO?

Ideally, a business that starts out small eventually grows bigger and more profitable. In many cases, the business gets to the point where the owners may wish to consider taking it public, or offering shares of the company to the public through an initial public offering, or IPO. The process for filing an IPO can be lengthy; however, it can make or break a fledgling company's chances of success in the stock market.

Before filing an IPO, a company must carefully prepare a number of financial and informational documents regarding the company. If the company does not already have an excellent accounting firm, one should be retained. A thorough and accurate financial statement must be completed to offer potential investors. Financial statements must also be updated on a regular basis, or immediately if there is a substantial change in the company's financial situation, in order to avoid accusations of fraud.

In addition to the financial statement, a company should prepare a complete prospectus regarding the business. Although there is not a specific format or rules regarding the prospectus, more is generally better. The company history, management credentials, and business affiliates or partners are often part of the prospectus.

The next step in filing an IPO is to decide on one or more underwriting banks. A business filing for an IPO must contract with an underwriting bank to sell shares of its stock to the public. The underwriter then receives a commission for selling the shares to the public.

There are a number of types of contracts used to sell shares, such as a firm commitment or best efforts contract. Under a firm commitment contract, the underwriter guarantees to sell all the shares at a pre-determined price; however, the underwriter will take a significantly larger commission under this agreement. Under a best efforts contract, the underwriter simply agrees to use its best efforts to sell the stock and receives less commission.

An official application must also be submitted when filing an IPO. The actual application may be requested from the stock exchange in the jurisdiction where the filing is to be made. In most cases, however, the application for filing an IPO may be secured from the underwriting bank. As a rule, the bank will also help the applicant complete the application. A fee is also required when filing an IPO, which will vary depending on a number of factors, such as the jurisdiction, the number of shares offered, and the value of the offering.