What is an IPO?
An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to fuel their company’s growth often use IPOs as a way to generate the capital needed for expansion.
Although further expansion is an advantage for the company, it has both advantages and disadvantages when the company goes public.
pros and cons of going public
As stated earlier, financial gains in the form of capital appreciationI The most distinctive advantage. The capital can also be used to fund research and development (R&D), fund capital expenditures, or pay off existing debt.
Becoming an IPO is a costly and time-consuming endeavor – the benefits of going public can be many but there can also be drawbacks, especially for small businesses.
there is another advantage IPublic awareness of the company increased as IPOs often generate publicity by making their products known to a new set of potential customers. Subsequently, this may lead to an increase in the market share for the company. An IPO can also be used by setting up individuals as an exit strategy. Many venture capitalists have used IPOs to capitalize on successful companies they helped start-ups.
Pros and cons of a company going public
Even with the benefits of IPOs, public companies often face several disadvantages that can make them think twice about going public. One of the most significant changes is the need for additional disclosure for investors. In addition, public companies are regulated by the Securities Exchange Act of 1934 with respect to periodic financial reporting, which can be difficult for new public companies. They must also meet other rules and regulations that are monitored by the Securities and Exchange Commission (SEC).
More importantly, especially for smaller companies, is that the cost of complying with regulatory requirements can be very high. These costs only increased with the advent of the Sarbanes-Oxley Act. Some additional costs include financial reporting documents, audit fees, investor relations departments and accounting oversight committees.
- To become an IPO, a company must be able to pay for the creation of financial reporting documents, audit fees, investor relations departments, and accounting oversight committees.
- IPOs often generate publicity by making their products known to a wider potential audience of customers, but taking a company public is a huge risk.
- Small businesses can find it difficult to afford the time and money it takes to get an IPO done.
- Privately held companies have more autonomy than public companies.
Public companies also face additional market pressures due to which they can focus more on short-term results rather than long-term growth. The actions of the company’s management are also increasingly scrutinized as investors seek ever-increasing profits. This may prompt management to use some questionable practices to increase earnings.
Before deciding whether or not to go public, companies must evaluate all the potential benefits and disadvantages that will arise. This usually occurs during the underwriting process as the company works with an investment bank to weigh the pros and cons of a public offering and determine whether it is in the best interest of the company for that time period.
Example: Snap Inc.
One high-profile company that fell through after its IPO is Snap Inc. (SNAP), best known for its flagship product, Snapchat. The company raised $3.4 billion in March 2017. Despite its initial surge above its $17 IPO price, the stock was struggling to maintain those gains. In its first quarterly report as a public company, Snap reported disappointing user growth figures. In May 2017, investors filed suit, alleging that the company had made “materially false and misleading” statements about user development. Snap settled for $187.5 million in January 2020.