Initial Public Offerings

History of the IPO

The first recorded initial public offering (IPO) took place in July 1791 when the Bank of the United States offered its equity for sale to the general public. The Insurance Company of North American followed suit shortly after. In the 19th century, the sale of government bonds to finance the Civil War effort continued the idea of a sale of securities for the purpose of raising funds. However, it was not until the 20th century and the dotcom boom that IPO reached general popularity.

Why IPO?

IPOs are essentially a private organization’s first sale of stock to the public. An IPO can be used to raise capital to meet a company’s business needs, facilitate a merger and acquisition, create liquidity for a company’s stock option program, or build the company’s reputation because public companies garner more trust from the public.

The Process

When a company decides to execute an IPO, it is imperative to hire both an investment banker and a lawyer. The process of completing an IPO begins with engaging investment banker as an underwriter and initial deal negotiations. Once a deal has been negotiated, the company is required to register a statement with the SEC that includes information regarding the offering; providing the SEC with the background of management; financial statements and legal issues. While the SEC is examining the statement, the company publishes an initial prospectus. Upon approval from the SEC of the IPO, the company, in working with both the investment banker and the attorney may decide on a stock price and begin to sell the stock on the market. Even after the IPO, the company is subject to periodic reporting requirements.

IPO in the United States and China

For a truly global company, the U.S. exchanges are considered to be the most stable over the long-term, with high liquidity, transparency, proper disclosure laws, and straightforward accounting rules.
China has had enormous growth in the past 20 years which has been accompanied by a growth in IPO and the IPO market since the 1990s. In 2007 alone, the Shenzhen stock exchange, Shanghai stock exchange, and Hong Kong stock exchange all experienced increases of 132%, 83%, and 45% respectively. Economist estimated that China’s IPO market would produce earnings of US $90 million. Although there were rumors that China’s IPO market dried up in the beginning of 2008, current successful IPO markets might be showing a rebound. With the mainland exchanges operating closer to the international standards in terms of regulations, market infrastructure, risk management measures, and so forth, more and more Chinese companies are seeking listing in their home market.