Initial Public Offering (IPO) refers to the offering of shares of a private corporation to the public for the first time. The purpose of a public offering is to raise capital from public investors.
Public offerings benefit privately-owned companies to make their way to the headlines and achieve a monetary advantage. Companies will list their shares on a stock exchange. Therefore, the shares are now available for purchase by the general public.
Despite the simplistic term, going public is a very long, challenging, and tedious process for a company. Therefore, the public offering process involves rigorous preparation. Not only that, but companies also should take measures to increase public exposure post going public.
Before the companies can make public offerings, paperwork and financial disclosures are the main requirements. The requirements are set out by the Financial Services Authority or the Otoritas Jasa Keuangan, which regulates and supervises the financial sector.
To make the transition smooth, companies hire underwriters, usually investment bankers, to consult and help set up the initial price for the offering. Underwriters assist the company’s management prepare for the IPO by creating vital documents for existing investors and scheduling meetings with potential investors. The conference or exhibition with potential investors is often referred to as a roadshow.
There are multiple reasons why a company may decide to go public. Firstly, it is done for companies looking to expand their pool of shareholders, including investors such as founders, family, and friends.
Secondly, by going public, a company increases its access to raising more money to finance the business. Therefore, a public offering allows the company to grow more ferociously. The company could also use the financial advantages to fund research and development or pay off existing debts.
Thirdly, a company also increases credibility by going public as it requires transparency. This would help the company obtain better terms when borrowing funds. However, a factor often considered by companies considering going public is the accountability factor that follows such a decision, as these companies are now answerable to all the shareholders.
The Trend of Companies Going Public
The trend of companies going public has been upward for multiple reasons. IPOs provide companies with a financial cushion that gives room for companies to innovate and take risks that would further grow the company.
Aside from that, the public offering allows companies to be more liquid and opens roads for company owners to convert their ownership to other means of currency or investment.
IPOs enable the shares to be sold promptly with only minimal transactional costs. Investors and shareholders can now finance future projects. Companies on the verge of a breakthrough can get that final push towards the achievement with the public offering funds.
Another factor in doing an IPO is the potential of conduction and funding for mergers. Investing in similar businesses is something that companies could do with IPO funds to diversify.
The IPO Process for Startups
Several steps are integral for startups looking to go public. The first and primary step is to hire an investment bank that conducts underwriting. Underwriting essentially refers to the attempt of investment bankers to raise capital from investors on behalf of companies seeking to go public. In this, the investment banks act as a middleman.
The company then negotiates the deals with the investment bank to outline the number of funds to be raised, the securities issued, and the structure of the arrangements. Following this step, the investment bank aids the registration agreement to be filed with the Indonesian Stock Exchange, which includes financial statements, management background, and legal aspects of the companies.
The offering date is decided upon verification and approval by the authorities. After rigorous negotiation, the investment bank finally sells the securities in the stock market.
The Essentials for an Initial Public Offering
The essentials of doing an IPO are due diligence and regulatory filings. Due diligence refers to comprehensive and rigorous background research done on the company. This usually is done by combing through the company’s organizational data and gathering the company’s documents like the Articles of Incorporation, Shareholder List, Annual Reports, and supplementary business plans.
Following this, due diligence often focuses on the licenses a business has and the company’s tax filings. The Board of Directors, managers, and employees of a company are also constantly scrutinized to ensure that the company has been operating under the prevailing labor and other laws.
The final steps usually look into the customer information, the product or service provided by the company, and also the company’s assets.
By conducting due diligence, the underwriting team can understand the company, its operations, and the feasibility of going public. The benefits can be reaped by both the investor and the company itself. In this regard, InCorp Indonesia (formerly Cekindo) provides company registration and accounting services for companies looking to go public.