Initial public offering
The United States Securities and Exchange Commission regulates IPOs under the Securities Act of 1933. In the United Kingdom, the UK Listing Authority reviews and approves prospectuses while operating the listing regime. Companies must file lengthy documents called prospectuses disclosing details to potential purchasers. A red herring prospectus appears during the initial quiet period with bold red warning statements on its front cover. This document states that offering information is incomplete and may change before final approval. Brokers can take indications of interest from clients but cannot sell shares until the Registration Statement becomes effective. Sales require a final prospectus cleared by the Securities and Exchange Commission. Before legal actions initiated by New York Attorney General Eliot Spitzer, some large investment firms engaged in inappropriate practices involving research analysts. These firms allowed investment bankers to influence research reports seeking lucrative fees. The Global Settlement enforcement agreement addressed conflicts between banking and analysis departments across ten major U.S. investment firms. CSFB and Salomon Smith Barney faced allegations regarding fraudulent research reports issued in violation of the Securities Exchange Act of 1934.
Investment banks act as underwriters when companies offer their shares to the public through an IPO process. A lead underwriter enters into contracts with issuers to sell shares directly to investors. Large IPOs involve syndicates where multiple banks collaborate to distribute shares globally. Upon selling shares, underwriters retain portions of proceeds as fees known as underwriting spreads. The gross spread calculates as a discount from share prices sold to the public. Components include manager fees earned by syndicate members plus concessions paid to broker-dealers selling shares. Managing or lead underwriters typically receive up to eight percent of the gross spread in some cases. Multinational offerings may utilize many syndicates to handle differing legal requirements across regions. European issuers often work with domestic selling groups alongside separate corporations for US Canada and Asia markets. Law firms specializing in securities law assist with complex regulatory compliance during these transactions. Magic Circle firms in London and white-shoe firms in New York City frequently handle these engagements. Financial printers prepare final prospectuses electronically filing them with the Securities and Exchange Commission after proofreading edits.
Companies appoint bookrunners to help determine appropriate offering prices for their shares. Two primary methods exist: fixed price setting or book building based on confidential investor demand data. Historically many IPOs have been underpriced generating rapid rises when stocks first trade publicly. This phenomenon creates an IPO pop that benefits early allocators who flip shares quickly for profit. One extreme example occurred on the 13th of November 1998 when theglobe.com priced at nine dollars per share. Bear Stearns underwrote this offering which rose one thousand percent opening day reaching ninety-seven dollars high. Selling pressure from institutional flipping eventually drove the stock back down closing at sixty-three dollars. The company raised about thirty million dollars but potentially left upwards of two hundred million on the table due to underpricing. Overpricing risks causing stocks to lose marketability if offered above what markets will pay. Facebook's 2012 IPO exemplified dangers when stocks fell value immediately after public trading began. Underwriters balance stimulating interest against raising adequate capital through key performance indicators and non-GAAP measures. Syndicates arrange share purchase commitments from leading institutional investors before final pricing decisions.
A Dutch auction allows shares allocated solely based on price aggressiveness with all successful bidders paying identical prices. OpenIPO uses economist William Vickrey's system ranking bids highest to lowest accepting those allowing full sales. All winning bidders pay same price unlike discriminatory auctions where each pays their bid amount. Treasury bills since the 1990s utilize uniform price auctions similar to modern IPO models. Large IPO auctions include Japan Tobacco Singapore Telecom BAA Plc and Google ordered by proceeds size. Variations took U.S. companies public including Morningstar Interactive Brokers Group Overstock.com Ravenswood Winery Clean Energy Fuels Boston Beer Company. Google used this system for its initial public offering in 2004 despite traditional bank resistance. The method eliminates favorable treatment accorded important clients by conventional underwriters while providing equal access. WhiteGlove Health Inc announced a Dutch auction in May 2011 postponed September after failed pricing attempts. Broader stock-market volatility and global economy uncertainty made investors wary of new stocks that year. No U.S. evidence indicates Dutch auctions fare better than traditional methods in unwelcoming market environments. Hundreds of auction IPOs occurred internationally though still little-used within American public offerings.
Saudi Aramco raised twenty-nine point four billion dollars during its 2019 initial public offering making it largest ever. Alibaba Group followed with twenty-five billion dollars in 2014 while SoftBank Group secured twenty-three point five billion in 2018. Agricultural Bank of China raised twenty-two point one billion dollars in 2010 and Industrial Commercial Bank of China brought in twenty-one point nine billion in 2006. American International Assurance collected twenty billion five hundred million dollars in 2010. Visa Inc raised nineteen point seven billion dollars in 2008 and General Motors eighteen point fifteen billion in 2010. NTT Docomo generated eighteen point zero five billion dollars in 1998 and Enel sixteen point fifty-nine billion in 1999. Facebook's 2012 offering reached sixteen point zero one billion dollars despite mixed reception. Prior to 2009 the United States led global IPO issuance by total value. Hong Kong Stock Exchange surpassed New York Stock Exchange in proceeds starting 2009 reaching thirty-four point three billion in 2025. Nasdaq recorded fifty-seven point eight billion in 2020 then one hundred point six billion in 2021 before dropping to thirty-one point three billion in 2023. Shanghai Stock Exchange handled fifty-six point five billion in 2022 while National Stock Exchange of India processed twenty point three billion in 2024.
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Common questions
What was the first U.S. IPO and when did it occur?
The first U.S. IPO emerged around 1783 with the Bank of North America offering shares directly to the public. This event marked the beginning of direct public offerings where issuing companies set share prices themselves before 1860.
Who regulates initial public offerings in the United States and what documents are required?
The United States Securities and Exchange Commission regulates IPOs under the Securities Act of 1933. Companies must file lengthy documents called prospectuses disclosing details to potential purchasers including red herring prospectuses during the initial quiet period.
How do investment banks earn fees from initial public offerings?
Investment banks act as underwriters when companies offer their shares to the public through an IPO process. Upon selling shares, underwriters retain portions of proceeds as fees known as underwriting spreads which typically include manager fees plus concessions paid to broker-dealers.
Which company had the largest initial public offering in history and how much money did it raise?
Saudi Aramco raised twenty-nine point four billion dollars during its 2019 initial public offering making it the largest ever. Alibaba Group followed with twenty-five billion dollars in 2014 while SoftBank Group secured twenty-three point five billion in 2018.
What is a Dutch auction initial public offering and how does Google use this method?
A Dutch auction allows shares allocated solely based on price aggressiveness with all successful bidders paying identical prices. Google used this system for its initial public offering in 2004 despite traditional bank resistance to eliminate favorable treatment accorded important clients by conventional underwriters.