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Initial Public Offering (IPO)

| April 30, 2024

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Key Takeaways

  • An initial public offering (IPO) is the debut of a company’s shares for sale on the stock market, marking the first time they are made available to the public.

What is Initial Public Offering (IPO)?

An IPO, or initial public offering, marks the debut of a private company’s shares in the public market. Through an IPO, a company gains access to equity capital from public investors.

The shift from a private to a public entity is a significant period for existing private investors, providing an opportunity to actualize gains, often accompanied by a share premium. Simultaneously, it opens the door for public investors to engage in the offering and become stakeholders in the company.

How Does an IPO Work?

Becoming a publicly traded company is a complex and time-consuming endeavour, often challenging for most companies to navigate independently. A private company intending to undergo an Initial Public Offering (IPO) not only needs to prepare for heightened public scrutiny but must also meticulously file extensive paperwork and financial disclosures to meet the stringent requirements set by regulatory bodies such as the Securities and Exchange Board of India (SEBI), responsible for overseeing public companies.

To streamline this process, private companies planning an IPO often engage the services of an underwriter, typically an investment bank. The underwriter serves as a consultant for the IPO, assisting the company in establishing an initial offering price. They play a crucial role in preparing the company for the IPO, crafting essential documents for investors, and organizing meetings with potential investors, commonly referred to as roadshows.

Robert R. Johnson, Ph.D., a Chartered Financial Analyst (CFA) and professor of finance at the Heider College of Business at Creighton University, explains, “The underwriter assembles a syndicate of investment banking firms to ensure widespread distribution of the new IPO shares. Each investment banking firm within the syndicate is tasked with distributing a designated portion of the shares.”

Following the determination of the initial IPO price by the company and its advisors, the underwriter issues shares to investors, marking the commencement of the company’s stock trading on a public stock exchange, such as the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Advantages Of Initial Public Offering (IPO)

Initial public offerings provide numerous advantages for companies, with the primary benefit being the ability to raise capital. For cryptocurrency firms, the advantages extend to increased exposure and the added prestige associated with being publicly traded.

Publicly traded status mandates heightened transparency, compelling companies to regularly update investors and shareholders on their financial and strategic status. This commitment to transparency, coupled with adherence to regulatory requirements for IPO and ongoing public listing, enhances the public image of crypto companies, benefiting the entire sector.

The heightened exposure that comes with being publicly traded can attract new customers, as crypto companies engaged in IPOs with regulatory compliance and exchange partnerships are perceived as more trustworthy. Quarterly reporting further clarifies a crypto company’s financial standing, potentially leading to more favorable credit terms.

Publicly traded status significantly boosts the liquidity of a company’s coins, making it easier for holders to buy or sell. This increased liquidity adds value for existing coin holders, facilitating the sale of their holdings.

Through an IPO, a company gains entry into public markets and can efficiently raise additional funds through secondary offerings. These offerings may involve the sale of new or privately held coins post-IPO. While secondary offerings may dilute the value of existing coins by introducing new ones to the market, they also offer opportunities for major coin holders to sell their holdings and receive proceeds.

Publicly traded companies can leverage their coins for compensation, attracting and incentivizing talent to contribute to the company’s growth. The increased liquidity of these coins, thanks to the crypto exchange listing, enhances their attractiveness. As the company’s value grows, the price of its coins or tokens tends to follow a similar upward trend.

IPO vs ICO

Despite often being presented as analogous terms, IPOs (Initial Public Offerings) and ICOs (Initial Coin Offerings) are fundamentally distinct.

  • IPOs typically pertain to established businesses that sell partial ownership shares to raise funds,While ICOs serve primarily as fundraising mechanisms for early-stage projects, with investors not acquiring any ownership in the company.
  • Furthermore, IPOs are subject to rigorous regulation by governmental authorities and generally operate effectively in centralized environments. In contrast, ICOs lack such regulatory oversight, resulting in higher associated risks.