An IPO, or initial public offering, is the process a private company uses to sell shares to the public for the first time, raising capital and getting listed on a stock exchange. The process typically takes several months, involves investment banks called underwriters, requires approval from the SEC, and costs the company a significant percentage of the money raised. Here’s how each stage works from start to finish.
Choosing an Underwriter
The first major step is hiring one or more investment banks to manage the offering. These banks are called underwriters, and they play a central role throughout the process. The lead underwriter (sometimes called the bookrunner) helps the company decide how many shares to offer, what price range to target, and how to present the company to investors.
Underwriters don’t work for free. They earn what’s known as a gross spread, which is the difference between the price they pay the company for the shares and the price they sell those shares to investors. Based on a sampling of public filings reviewed by PwC, underwriter fees typically range from 3.5% to 7.0% of the total amount raised. On a $500 million IPO, that translates to somewhere between $17.5 million and $35 million. The gross spread covers not just the banks’ profit but also legal and accounting expenses, registration fees, and commissions paid to broker-dealers who help distribute the shares.
In a traditional IPO, the underwriter actually purchases the shares from the company and then resells them to investors through its distribution network. This arrangement shifts some of the risk to the bank, which is part of why the fees are substantial. Some underwriters even guarantee the sale of a specified number of shares at the initial price.
Filing the Registration Statement
Once the underwriter is on board, the company files a registration statement with the SEC, typically using Form S-1. This document is the backbone of the entire IPO. It contains detailed financial statements, a description of the company’s business model and competitive landscape, risk factors, how the company plans to use the money it raises, and information about management and executive compensation.
The SEC’s staff reviews this filing to check for compliance with disclosure rules and accounting standards. Reviewers look for disclosures that conflict with SEC rules, appear materially deficient, or lack clarity. This review process almost always results in revisions. The SEC sends comment letters, and the company files amended versions of the S-1 until the staff’s concerns are resolved. This back-and-forth can take weeks or even months depending on the complexity of the company’s financials.
The Roadshow and Pricing
While the SEC review is underway, the company and its underwriters begin what’s called a roadshow. This is a series of presentations to institutional investors, such as mutual funds, pension funds, and hedge funds, where company executives pitch the investment opportunity. The roadshow typically lasts one to two weeks and involves meetings in major financial centers.
During this period, underwriters collect “indications of interest” from prospective investors. These aren’t binding commitments, but they signal how much demand exists and at what price levels. The underwriter uses this information to recommend a final offering price to the company. The company ultimately decides the price, but it relies heavily on the underwriter’s read of investor appetite. If demand is strong, the price might land at the top of the estimated range or even above it. If demand is soft, the company may price lower or, in rare cases, postpone the offering entirely.
The underwriter also decides which investors receive shares, a process called book-building. This gives the bank significant influence over who becomes an early shareholder, and allocations often favor the bank’s best institutional clients.
Going Effective and First Day of Trading
Once the SEC staff’s comments have been fully addressed, the SEC declares the registration statement “effective,” meaning the company can proceed with the offering. At this point, the final offering price is set, shares are allocated to investors, and the company files a final prospectus (usually identified as a 424B3 or 424B4 filing in the SEC’s EDGAR database). This final prospectus includes the exact offering price and other details that weren’t available in the preliminary version.
The shares then begin trading on the chosen exchange the next business day. The opening market price may be higher or lower than the IPO price, depending on broader market conditions and investor enthusiasm. A big first-day price jump is often celebrated in the media, but it can also mean the company left money on the table by pricing too low.
Exchange Listing Requirements
To trade on a major exchange like the NYSE or Nasdaq, a company must meet specific listing standards. These requirements vary by exchange and by the tier within each exchange, but they generally involve minimum thresholds for market value, number of shareholders, and share price.
For example, listing on the Nasdaq Capital Market requires at least 400 public shareholders and a minimum market value of publicly held shares in the tens of millions of dollars. The Nasdaq Global Market sets even higher thresholds. The NYSE has its own set of standards. Companies that don’t meet major exchange requirements may trade on smaller venues, though most high-profile IPOs target the NYSE or Nasdaq for the visibility and credibility they provide.
The Lock-Up Period
After the IPO, company insiders can’t immediately sell their shares. Before going public, the company and its underwriter enter into lock-up agreements that prohibit insiders, including employees, their friends and family, and venture capital investors, from selling shares for a set period of time. Most lock-up periods last 180 days, though the terms can vary. Some agreements limit the number of shares that can be sold even after the lock-up expires.
Lock-up agreements exist to prevent a flood of shares from hitting the market right after the IPO, which could tank the stock price. U.S. securities laws require companies to disclose the lock-up terms in their registration documents, so investors can see exactly when insider selling becomes possible. When a lock-up period expires, it’s common to see increased trading volume and sometimes a temporary dip in the stock price as insiders take the opportunity to cash out.
What the Typical Timeline Looks Like
From the decision to go public to the first day of trading, a traditional IPO usually takes four to six months. The early weeks involve selecting underwriters, assembling legal and accounting teams, and preparing the S-1 filing. The SEC review process adds several more weeks, sometimes longer if the company’s financials are complex or the staff raises significant concerns. The roadshow and pricing happen in the final two to three weeks before the stock begins trading.
After listing, the company enters a new reality of quarterly earnings reports, public disclosure obligations, and scrutiny from analysts and shareholders. The transition from private to public is not just a financial event but an operational shift that affects how the company communicates, compensates employees, and makes decisions.
How a Direct Listing Differs
Not every company follows the traditional IPO path. In a direct listing, a company lists its shares on an exchange without hiring underwriters to buy and resell the stock. No new shares are created, and no capital is raised by the company itself. Instead, existing shareholders (founders, employees, early investors) sell their shares directly to the public on the open market.
Because there’s no underwriter managing the process, the company avoids the 3.5% to 7.0% underwriting fee. There’s also no lock-up period in a direct listing, so insiders can sell shares from day one. The trade-off is that there’s no guaranteed price and no institutional roadshow building demand before shares start trading. The opening price is determined entirely by supply and demand on the exchange.
Direct listings have been used by well-known companies that already had strong brand recognition and didn’t need the capital-raising component of a traditional IPO. For most companies, especially those that need to raise significant funds, the traditional underwritten IPO remains the standard approach.