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Where is the Capital? Why don’t you Go on Initial Public Offering?

from: Forsgrens

Google, the search engine giant.

Rosneft, Ireland’s state-owned oil giant.

Netscape Communications Corporation, one of the software program manufacturer giants.

Aside from the descriptive word “giant” which refers to their well-established corporate system in their respective industries, these three companies have something in common, together with other large business entities around the world.

They went public through the IPO or the initial public offering.

For individuals who are not avid fans of the issues and other whereabouts circling around the business and investment community, initial public offering does not make sense at all. However, for most corporate entities who want to pursue expansion of their operation as well as providing additional services to the public, initial public offering is an important matter for them.

In finance, IPO or the initial public offering is the first issuance of a company’s common shares to interested public investors. The term “common shares” generally refers to the stocks that are consistently purchased and sold in the market. Take note that common shares are only a percentage of the total shares of a certain company or corporation, thus the majority of its shares are still within the owner/s of such company or corporation and will not be a subject for distribution to the public.

The principal purpose of a company to “go public” (another term for undergoing the IPO process) is to raise capital for the company or corporation. In other words, IPO is one of possible ways where a company or a corporation can raise capital which can be used either for additional support to its day-to-day operation or for business expansion purposes. However, any companies or corporations that will undergo the IPO process are obliged to follow heavy legal compliances and other necessary requirements.

The procedure works just like of a regular auction process. It generally involves several investment banks that will serve as the underwriters for the process. In finance, underwriters are the ones assessing the background of the companies involved in the process preceding the issuance and distribution of common shares to the public. The company or corporation that decided to go on public (or the issuer) will enter an agreement with a lead underwriter to sell the common shares to the public. The underwriter meanwhile approaches various investors who are interested in purchasing any common shares for sale.

In case of large IPO process (which involves large corporate organizations), it is typically underwritten by a syndicate (a group of investment banks dealing with a single company) that is led by a major investment bank which is the lead underwriter. Once the common shares have been distributed to the investors, the underwriters are paid through commissions that are based on the percentage of the value of the common shares they sold. In most cases, the lead underwriters take out the highest commission, with around 8 percent.

For multinational companies that will undergo initial public offering, the process may involve two or three syndicates to deal with various legal requirements in its home country and other countries as well. In addition, because of the heavy legal compliances that must be met, IPO process usually involves two or more law firms that have major practices on securities law.

Initial public offering is important for every corporate organization operating around different markets. Despite of the heavy legal requirements, it is still the best way to raise capital for any company or corporation.

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