eli5 making an IPO


What kind of governmental or practical restrictions do companies face when deciding the value of the shares they want to be the starting price and how many they’re allowed to open to the public?

For example, what’s to stop the company from putting up 500,000 shares for 0.01c instead of 500shares for $10?

In: 6

The process of an IPO is long and tedious. Typically new startups or companies have “backers” who provided initial funding and/or resources and own a portion of that company. These could be “angels” or VC funds etc. These owners have a say in determining the outlines of the IPO since it very likely dilutes their shares but, in return, might give the company additional capital funding and also the early investors a means to cash out their investment.

The process itself involves consulting with an underwriter – typically a financial institution like an investment bank – that helps to provide liquidity and marketing for the potential IPO. As they underwrite (ie insure) some of the IPO risks, the underwriters also have a say in how the IPO is structured.

And, of course, in the US, companies have to comply with listing requirements of the SEC (Security and Exchanges Commission). On top of that, they have to IPO with a certain exchange (market) and these exchanges have their own rules as well. (They probably will not accept an IPO of 1000 shares as these would be too low a quantity to be liquid in the market)

The outcome of all of these compliance requirements and negotiations will determine how the IPO is structured.