Week VI: Considerations for an Initial Public Offering IPO

Considerations for an Initial Public Offering IPO
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Considerations for an Initial Public Offering IPO
An initial public offering (IPO) is understood as the process by which a private firm issues shares of stock to members of the public for the very first time. It is a major phase in the growth of many small business enterprises given that the IPO gives them access to the public capital market and increases both their exposure and credibility (Berk & DeMarzo, 2014). This paper discusses the many considerations for an IPO.
When deciding to take an organization public in the form of an IPO, the advantages and disadvantages to being a public corporation have to be taken into account. The advantages that have to be considered include the following: increased prestige. A public company is usually more visible and better known in comparison to a private firm, thus enabling them to gain a bigger market for their services and/or products. A publicly-listed company can access larger pools of financial capital and various sorts of capital (Boulton & Campbell, 2016). Secondly, an IPO results in increased capital. An IPO allows an organization to raise an adequate amount of money to utilize for its many corporate purposes for instance expanding the plant and equipment, marketing, acquisitions, working capital, and even research and development (Berk & DeMarzo, 2014).
The third advantage is valuation. Ragupathy (2011) stated that public trading of the shares of a business organization sets a value for the corporation that is set by the public market and not by subjective standards set by private valuators. In essence, this is important for companies that seek an acquisition or merger. In addition, it enables the shareholders of the company to know the value of the shares. Another advantage that has to be taken into consideration is increased wealth brought about by the IPO. Company’s founders usually have the sense of increased wealth owing to the initial public offering (Fjesme, 2016). Equally important, an IPO increases a company’s liquidity. As soon as the company’s shares are traded on a public exchange, they have a market value and could be resold. This is important as it enables an organization to attract talented employees and retain them through offering them stock incentive packages. Additionally, it gives company investors the option of trading their shares, which helps to enhance the confidence of investors (Boulton & Campbell, 2016).
Even so, there are also a number of disadvantages to IPO that have to be considered. The first one is disclosure. The Security and Exchange Commission rules on disclosure are very wide-ranging. Publicly-listed firms have to offer information as regards lawsuits, material contracts, how the firm is intending to develop future products, competitive positions, conflicts of interest, transaction with parties that are related to the firm, and compensation of their top executives. Moreover, after the offering statement becomes effective, the organization will have to make fiscal disclosures as stipulated by the Securities and Exchange Act of 1934. According to this law, public companies are required to file qu...