Initial public offering

• 1. Introduction

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  In ancient Rome, near the Temple of Castor and Pollux, something remarkable was happening in the Forum. Ordinary people were buying and selling shares in organizations called the publicani, bodies whose ownership was divided into parts that fluctuated in value and attracted speculators known as quaestors. That is the earliest known ancestor of what today we call an initial public offering, or IPO. Thousands of years later, the mechanics are more elaborate, but the basic idea is the same: a private company opens itself up to the public, sells pieces of itself, and is changed forever. How does that process actually work? Who profits, who loses, and why do shares sometimes soar a thousand percent on their first day of trading?

• 2. From Rome to Wall Street

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  Publicani, those Roman share-issuing bodies, lost favor when the Republic fell and the Empire rose. The thread of public ownership then lay dormant for centuries before resurfacing in recognizably modern form. In the United States, the first IPO was the public offering of Bank of North America around 1783. Financial historians Richard Sylla and Robert E. Wright showed that before 1860, most early U.S. corporations sold shares directly to the public without investment banks acting as middlemen. Those researchers called the method the direct public offering, or DPO. The price was set by the issuing corporation itself, not determined by demand, which eliminated the conflicts of interest that arise when a bank sits between a company and its investors. That older direct model later gave way to the underwritten system that dominates today, though its ghost persists in methods like the Dutch auction.

• 3. The Underwriting Machine

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  Retention of an underwriter is typically the first major step a company takes once it decides to go public. The company, called the issuer, contracts with a lead investment bank that then approaches investors with offers to sell shares. Large deals usually involve a "syndicate" of banks, with the largest taking the position of lead underwriter. The lead underwriter, also called the bookrunner, typically takes the highest slice of a fee called the underwriting spread, which can reach up to 8% of the gross proceeds in some cases. That spread is carved into components: a manager's fee, an underwriting fee for syndicate members, and a concession earned by the broker-dealers who actually place shares with clients. Because IPOs also trigger a thicket of securities law requirements, companies typically retain law firms with major practices in that area, including what the source describes as the Magic Circle firms of London and the white-shoe firms of New York City.

• 4. The Price Discovery Problem

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  Arriving at a share price is one of the most consequential decisions in any IPO. Two main approaches exist: a fixed price set by the company and its advisers, or book building, in which the bookrunner compiles confidential data on investor demand and uses that to set the price. History shows that many IPOs have been underpriced, and the effect is dramatic. When a stock is offered below what the market will pay, it produces what is known as an IPO pop on the first day of trading. The theglobe.com IPO, underwritten by Bear Stearns on the 13th of November 1998, illustrates the extreme end of that phenomenon. Priced at $9 per share, the stock surged 1,000% on its opening day, reaching a high of $97 before institutional selling pressure drove it back down to close at $63. Although the company raised about $30 million from the offering, estimates suggested it may have left upwards of $200 million on the table. Overpricing carries its own dangers: if buyers do not materialize at the offered price, underwriters struggle to place shares and the stock may lose value and marketability on its very first day, a fate perhaps best illustrated by the Facebook IPO in 2012.

• 5. Quiet Periods and Red Herrings

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  American securities law imposes two separate stretches of restricted speech, both called quiet periods. The first begins after a company files its S-1 registration statement and lasts until the SEC declares that statement effective. During this window, company insiders, analysts, and underwriters are legally restricted in what they can say publicly about the upcoming offering. The second quiet period runs for 10 calendar days after the first day of trading, during which insiders and underwriters cannot issue earnings forecasts or research reports. When it ends, underwriters typically launch research coverage on the new public company. A three-day waiting period also applies to any bank that acted as a manager or co-manager in a secondary offering. Before the quiet period ends, potential buyers receive a document called a red herring prospectus, named for a bold red warning on its cover stating that the offering information is incomplete and may change. Shares cannot actually be sold during that phase, but brokers can collect indications of interest from clients, which can later be converted to buy orders once the registration statement becomes effective.

• 6. The Dutch Auction Alternative

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  OpenIPO is a version of the Dutch auction system designed by economist William Vickrey, and it takes a fundamentally different approach to share allocation. Bids are ranked from highest to lowest. The highest bids that allow all shares to be sold are accepted, and every winning bidder pays the same price. The method mirrors how the U.S. Treasury has auctioned bills, notes, and bonds since the 1990s, replacing the older discriminatory model in which each winning bidder paid a different price. Google used the Dutch auction system for its own IPO in 2004. Other U.S. companies that went public this way include Morningstar, Interactive Brokers Group, Overstock.com, Ravenswood Winery, Clean Energy Fuels, and Boston Beer Company. Traditional investment banks have resisted the auction model, in part because it eliminates the preferential treatment they can offer favored clients under the conventional system. The resistance has worked: despite hundreds of auction IPOs in other countries, the method remains rarely used in U.S. public offerings. A Dutch auction IPO by WhiteGlove Health, Inc., announced in May 2011, was postponed in September of that year after several failed attempts to price, with a Wall Street Journal article citing stock-market volatility and uncertainty about the global economy as the causes.

• 7. Conflicts, Settlements, and Flippers

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  Before the Global Settlement enforcement agreement brought by New York Attorney General Eliot Spitzer, some large investment firms had initiated favorable research coverage of companies specifically to support their corporate finance and retail marketing divisions working on new issues. The settlement involved ten of the largest investment firms in the United States. One typical violation involved CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning of hot IPOs and to have issued fraudulent research reports in violation of various sections within the Securities Exchange Act of 1934. On the investor side, a different kind of opportunism goes by the name stag profit in the United Kingdom and flipping in the United States. A stag subscribes to a new issue expecting the price to rise immediately and then sells at once to capture that gain. Flipping can generate significant profits for those who receive allocations at the offering price, but institutional flipping is also exactly what eventually drove theglobe.com's share price back down from its opening-day high.

• 8. The Biggest Raises

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  Saudi Aramco's 2019 IPO raised $29.4 billion, making it the largest in history by nominal proceeds. Alibaba Group's 2014 offering raised $25 billion, followed by SoftBank Group at $23.5 billion in 2018. The landscape of where IPOs happen has also shifted. Prior to 2009, the United States was the leading issuer of IPOs by total value. Since then, the Hong Kong Stock Exchange, the New York Stock Exchange, Nasdaq, and the Shanghai Stock Exchange have each taken the top spot in different years. In 2021, the leading market produced $100.6 billion in IPO proceeds, the highest single-year figure in the source data. In the first quarter of 2026, Hong Kong led with $14.2 billion, a sign that the center of gravity in global public markets continues to move.