An IPO, also known as the Initial Public Offering is a favorite with new ventures. For those not familiar with the term, an IPO is the first time a company decides to make its shares available to the general public. It enables you to raise funds from people by promising them a portion of your profits later. Sounds good? However, the markets can also prove treacherous for newcomers. Speculation reigns high and so is the probability of going from riches to rags. If you are contemplating an IPO, then make sure that when it comes to basics, you are not completely at sea!

All Hands Meeting: Any firm planning an IPO will, typically, need to hire an Investment Bank and a team of lawyers and accountants, who will at a later date, come together for an all hands meeting. This meeting is usually held close to two months before the planned IPO and is meant for team players to decide their plan-of-action.

Disclosure and Prospectus: The disclosure, as the name suggests, requires that the company reveal all that needs to be known about its business, especially in terms of growth plans and risk faced. All the relevant data, ranging from legal documents to financial records, must be organized chronologically, in the form of a prospectus, also known as a “red herring”. For an IPO in the United States, the prospectus will have to be filed along with the “S-1 document” with the Securities Exchange Commission (SEC). Together, they form the registration statement. The SEC requires a “quiet period” to be maintained for about 25 days after the stock starts trading. So, the prospectus may well be the only source of information for interested investors during that period. Needless to say, it is an incredibly important document.

Underwriting: The Investment Bank is responsible for finding investors. If they fail to do so, they will have to buy the shares themselves. In return for underwriting or assuming this risk, they charge a fee, which is deducted once the funds are raised. Underwriting by a reputed firm lends credibility to the IPO. Often, there is more than one underwriter and in such a case the one in charge is called the lead underwriter or lead manager. Once the prospectus is filed with the SEC and a response is awaited, the lead manager sets out to find prospective investors. When more than one underwriter is involved, the lead underwriter assigns a certain number of shares to every member of the syndicate (fancy name for the other investment banks in the team) for which they have to find takers.

The “Multi-City” Tour: Simply put, this is a road show to attract the big investors. Doing a tour of big cities where such investors can be found, presenting the business plan to them and convincing them to invest in your firm, are all necessary steps to a successful IPO. All that couldn't be said through the prospectus can be mentioned during the road show. Apart from a good business plan, investors would also want to know about the people in charge; the Management and the Board of Directors. So before you go in for an IPO, make sure you have the right people by your side. The final prospectus can then be printed and distributed to the investors.

Pricing: Based on the expected demand for the stock, the Investment Bank fixes an appropriate price per share (or even a price band in certain countries). Interested investors are invited to apply for the shares at that price. Allotment of shares is a function of supply and demand. In case of excessive demand, also called, oversubscription, the company can decide to issue more shares than originally planned. This is also called a “greenshoe option”.

The IPO: The IPO is considered to be official a day or two after the prospectus is distributed and the price decided upon. The Investment Bank continues to be responsible for the IPO's performance for atleast seven days after it becomes official (this may vary from country to country). During this time period, the company may also withdraw the IPO. After a period of seven days, it is considered final and no change of mind will be entertained.

Another interesting option is the Direct Public Offering, also called the DPO. Through a DPO you can go public without the help of an underwriter and trade over the internet. Learn all you would want to know about IPOs and DPOs in, “Going Public: Everything You Need to Know to Take Your Company Public, Including Internet Direct Public Offerings” by James B. Arkebauer & Ron Schultz. “IPO Decision: Why and How Companies Go Public” by Jason Draho, could also come in handy.

The nuances of opting for an IPO can be mind boggling, but with good team members, sound knowledge of the markets and a great business plan, it should be no challenge at all!