IPO 101: All You Need To Know About An Initial Public Offering (IPO)

January 6, 2022

Diversifying your investments entails more than merely balancing your portfolio’s equities and bonds. Fine art and other alternative assets may also have a place in your portfolio.

The wealthy elites are no longer the only ones collecting and investing in art.

You can diversify your assets and perhaps locate something pleasant to hang on the wall if you are interested in art. As an investor, you can help your company raise a lot of money quickly by going public. Going public also provides a company with numerous opportunities for publicity and media coverage. Before your company goes public, here’s what you should know.

What Is an IPO?

When a privately owned company sells shares to the general public for the first time, it is called an initial public offering. An IPO, in essence, is the transition of a company’s ownership from private to public. As a result, the IPO process is often known as “going public.”

Companies typically go public to raise capital to pay off debts, fund expansion plans, improve their public profile, or allow company insiders to diversify their holdings or create liquidity by selling all or a percentage of their private shares.

How Does an IPO Work?

When a company wants to go public, it hires an investment bank (or a group of investment banks) to underwrite the IPO, usually after demonstrating a track record of growth and other positive outcomes. Banks support initial public offerings by committing large sums of money to purchase the shares before they are listed on any public exchange.

Additional tasks of the underwriter include completing due diligence on the company, which involves reviewing financial data and examining its business plan and prospects. The firm that is going public submits a registration statement with the Securities and Exchange Commission (SEC), which includes its prospectus, with the help of the underwriter.

Why do Companies Pursue IPOs?

Going public has several advantages, the most important of which is easier access to capital. An IPO’s proceeds can be utilized for expansion, market research, marketing, and various other uses.

Equity holders in the formerly private company are likewise rewarded when the company goes public. Once a stock is publicly traded, executives, employees, and anyone who owns equity stakes can sell them quickly following a six-month lock-up period. This lock-up period helps keep the price of freshly issued shares stable by prohibiting insiders from selling all of their holdings at once directly after the IPO.

Drawbacks to Going Public

Companies must comply with SEC reporting standards. Publicly-traded corporations must produce frequent disclosure statements, report financial results, hold quarterly earnings calls, and operate transparently. These things all take time and organization-wide coordination. Failing to do any of these things efficiently can spell disaster or a newly public company. Once you submit yourself to these new requirements and regulations, there’s no going back.

Are (IPOs) Good Investments?

Though initial public offerings (IPOs) might benefit issuing corporations, they are not necessarily beneficial to individual investors. Investing in initial public offerings (IPOs) can be helpful, but it is also much riskier than buying stock in established public companies. Because demand for newly issued stocks is often unclear at the outset, the prices of freshly published stocks might fluctuate dramatically on the first day of trading and in the days that follow.

What Happens If an Initial Public Offering Fails?

When a company goes public, the hope is that everyone will profit. An IPO, if successful, raises a large sum of money to keep a company afloat. When the founders sell their private shares, they usually make a tidy profit. What happens if the unexpected occurs and the company cannot sell enough shares to stay afloat?

This is the moment for businesses to put all of the paperwork they’ve accumulated to good use. Other funders may be interested in documents detailing their business strategy, sales, profitability, and sales projections.

Companies with trouble recruiting new investors may need to cut costs and postpone new projects until the IPO has stabilized. There are various additional options for IPOs to raise money to stay afloat.

What Factors Influences the Success of an IPO?

There are many different levels of success. Here are some examples of how to assess an IPO’s success:

  • Capital raised: Even though the typical IPO deal size between January 1, 2007, and March 31, 2021, was $163 million, several companies managed to raise IPO money over that amount.
  • Value: Strong demand for IPO shares often leads to a greater valuation for the company since IPO investors register their interest in the stock, resulting in an “oversubscribed” book.
  • Share price appreciation/return: A rise in the share price on the first day of trading and from the IPO to the current trading price is considered a standard measure of success.
  • Recruiting new customers and talent: Going public raises corporate awareness among potential customers and can aid in the recruitment of top talent.
  • Supplier Confidence: In terms of stability and long-term growth potential, suppliers generally view the IPO process as a net benefit for the IPO firm.

There are numerous approaches for a company going public to attract investors to its initial public offering (IPO). A company with higher growth than the industry average will generally attract buy-side investors. Investment bankers look for companies that can meet several criteria to increase the possibilities of a successful offering and strong aftermarket performance.

Who We Are

At Masterworks, we have the most comprehensive price database of paintings purchased and resold throughout history. This allows us an eagle’s view on artist markets and allows us to accurately evaluate which works are gaining value. Visit our website to learn more about investing in art and other assets.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.