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Initial Public Offering -10 Steps To "Initiation" Of An Initial Public Offering!

Apr 2, 2008
Any organization/institution/corporation makes new plans from time to time for its further growth and expansion. Whatever they may be, everything requires money. The necessary funds could come from the incorporation of new products, or from an initial public offering.

Let us assume for some time that you have been appointed as the top decision-maker in a corporate organization. And let us see how the whole process is worked out, ultimately leading to the initial public offering--

(1) Being the administrator/chief executive, it now lies upon your head to ensure that new corporate plans go through and there is sustained growth of the company.

(2) The latest suggestion is that new products be incorporated and sold under the brand name of the company. This would enable the business operations to stretch from being just regional, to becoming national.

(3) The plan looks feasible, but needs funds to support it. The board of directors has two suggestions to offer. Profits are coming in as the corporation is exhibiting successful business growth; so the profits provide an opening for obtaining a corporate loan.

The additional funds that come in with the secured loan should be enough for bringing out additional new products, plus help in expanding business operations. The products are of course, meant for sale.

(4) A word of caution here. It has to be proved definite that there are sufficient assets with the corporation to be used as a collateral or guarantee. This precaution is necessary if the loan should falter in future.

(5) The board now asks, "What about the corporation going public?" What they mean to say is that the company could offer an initial public offering (IPO) to the public. IPO indicates putting up the corporation's common shares for sale. Those investors/traders who were interested would come forward to purchase them.

(6) The advantage to IPO is that the important assets of the company would remain safe, since the revenue generated from the sale of common shares would be more than enough to keep up the corporate's new plans.

(7) Now it is left to you (chief executive) to decide which option to pursue. If the corporation is a follower of the limited liability concept, taking out a corporate loan does not seem like such a bad idea. But seeing that the company's assets will have to be sacrificed, it does not appear to be a very good idea after all.

Additionally, there is the high interest to pay, along with the monthly repayments. This could have an impact on the generation of profits, since more of the money is going towards repayment of the loan.

(8) An initial public offering can therefore prove to be more profitable. The whole process involves hiring of underwriters. Since these people are meant to word documents in such a way that they attract potential buyers, the common shares have a greater chance of being disposed off easily.

Yes, the expenditure is more since you have to pay more people to get the whole process underway, but you will be able to save the assets of your corporation. Also, there is the guarantee of revenue being generated.

(9) Now let us think of a new situation, which you as the chief executive must handle! Say, there are 20,000 investors or traders who are interested in investing in the initial public offering. Your company has decided to offer them 100 common shares each, at a reduced price of 15% off on each. Is it possible that this sort of differential treatment to certain investors/traders is going to damage the corporation's image?

(10) There are certain facts to be made clear here.

(a) An initial public offering is governed by certain laws. The Federal Securities Act of 1993 declared that any corporate entity or company could not display an IPO, if it had around 20,000 investors/traders.

(b) If the investors/traders in your corporation number more than 300, the common shares are to be issued in public. Hence, the IPO no longer belongs to the "initial" category.

(c) Again, how may shares are being sold or bought, has no relevance at all. Imagine that the company's share falls at $90,000; but the share price of most "stocks" trade is $0.01. Your calculations should tell you that if you are disposing off 2 million shares, the profits generated will depend on how many total common shares have been sold--2,000,000 or 200,000,000?

Thus, as the chief executive of a large corporation, understanding how the laws governing an initial public offering work is crucial, before putting anything into action!
About the Author
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