The IPO Path: How a Private Company Goes Public

An initial public offering (IPO) is the process by which a private company first sells shares to the public and lists on a stock exchange. In a public offering, shares are sold to institutional investors and usually also to retail investors. For investors, it is one of the main ways an investment is realized — turned from illiquid equity into tradable stock or cash.

Why companies go public

The common reasons a company goes public are to raise new equity capital, monetize the holdings of existing private shareholders, and make it easier to raise capital in the future:

Raise capital at scale from public markets.
Provide liquidity to early investors, founders, and employees.
Gain currency — public stock that can be used for acquisitions and to attract talent.
Build credibility with customers, partners, and future investors.

The trade-offs are real: public companies face heavy disclosure requirements, quarterly scrutiny, and the cost and distraction of being public.

The legal foundation: registering the offering

A US IPO is built on the Securities Act of 1933, which has two basic objectives: to require that investors receive financial and other significant information about securities offered for public sale, and to prohibit deceit, misrepresentation, and other fraud in their sale. The company satisfies the first objective by filing a registration statement with the SEC — typically on Form S-1 — and it may not sell the securities until SEC staff declares that registration statement effective.

The registration statement must include a description of the company's business and properties, a description of the security being offered, information about the company's management, and financial statements certified by independent accountants. The same document, in its prospectus form, becomes the disclosure investors read before buying.

The traditional process

Get ready. Clean up financials, strengthen governance, and assemble a board and reporting capable of withstanding public scrutiny. This often starts a year or more ahead.
Hire underwriters. Investment banks ("underwriters") are engaged to advise on, price, and sell the offering. The lead bank is the bookrunner — the main underwriter, listed first among the underwriters, that sits closest to the issuer and controls the discretionary allocation of shares to investors. Most US IPOs are done on a firm-commitment basis, in which the underwriter is obligated to buy the entire issue at a predetermined price and resell it to the public at a higher price, earning the difference as the underwriting spread. The bookrunner takes the highest portion of that spread — in some cases up to 8%.
File the S-1. The company files its registration statement (the S-1 in the US) with the SEC, disclosing its business, risks, and audited financials. A back-and-forth of SEC review follows, and the company cannot sell shares until the filing is declared effective.
The roadshow. Management pitches the company to institutional investors to gauge demand and build the order book.
Price the offering. Based on the demand gathered during the book-building process, the company and bankers set the offer price and the number of shares the night before trading begins. A notable feature of the traditional IPO is that the price is not known until the end of the roadshow.
Trade. Shares begin trading on the exchange. Many IPOs have historically been underpriced, producing a rapid first-day rise known as the "IPO pop" (and sometimes a drop).
Lockup. Insiders are typically barred from selling for a period — commonly 90 to 180 days, restricting executives and large shareholders from selling so they do not flood the market and depress the share price immediately after listing.

Alternatives to the traditional IPO

There are three broad paths to the public markets: the traditional IPO, the direct listing, and the SPAC merger. They differ most in cost, pricing certainty, and how much new capital they raise.

Direct listing. The company lists existing shares directly, historically without issuing new ones or using underwriters to sell a block. Direct listings tend to be the least expensive path to the public markets. The model has since broadened: in December 2020 the SEC approved an NYSE rule permitting primary direct listings, which let a company raise capital and issue new shares through an opening auction on the first trading day without a traditional underwriter. Two SEC commissioners flagged the investor-protection trade-off: removing the underwriter also removes a gatekeeper and complicates the ability to trace shares for liability purposes.
SPAC merger. The company merges with a publicly listed shell to go public. A SPAC — special purpose acquisition company — is a blank-check shell company with no operating business that places its IPO proceeds in a trust or escrow account. It typically has a two-year window (up to three years) to complete the merger — the "de-SPAC" — and gives shareholders redemption rights to recover their pro rata share of the trust if they do not like the target. Pricing certainty also differs: in a SPAC the price is generally set when the deal is announced, rather than at the end of a roadshow. This route is covered in more depth in SPAC vs. IPO.

Where the IPO fits

An IPO is one of the exit routes that returns capital to a fund and its LPs — alongside acquisitions and secondary sales. For PE-backed companies in particular, it is a common end to the hold period.

Sources & further reading

Registration Under the Securities Act of 1933 — SEC / Investor.gov.
What You Need to Know About SPACs – Updated Investor Bulletin — SEC Office of Investor Education and Advocacy / Investor.gov.
SPACs (glossary entry) — SEC / Investor.gov.
Initial public offering — Wikipedia.
Lock-up period — Wikipedia.
Bookrunner — Wikipedia.
Underwriting — Wikipedia.
Statement by Commissioners Lee and Crenshaw on Primary Direct Listings — Harvard Law School Forum on Corporate Governance.
How to evaluate the three paths to the public markets — EY (Ernst & Young).