Decoding Public Offering – Pre-IPO, IPO, Listing

When a company goes public, there are many stages that it has to go through before finally getting a place in the free market. Learn what those stages are.


Today, companies view the public offering as one of the most effective ways to raise funds and plan an exit strategy. Established companies go public to raise large sums of money to fund their expansion plans, and start-ups that have built their brand to the limit see this as a good exit strategy.

However, a firm has to go through many nuances of the public offering process and numerous phases before going public. Let’s see what they are.

Pre-IPO (Pre-initial Public Offering) 

Pre-IPO is a stage for a company when it puts shares up for private sale as a last measure to raise capital before it goes public. By introducing more funds, the private company adopts a matured outlook and prepares itself better for going public.

Pre-IPO shares can only be bought by professional investors, high net worth individuals, venture capitalists, private companies, and corporate insiders such as company founders and employees.

Investors invest in private companies a few months or one year before the IPO registration in the pre-IPO phase. This also means that the more significant risks are associated with pre-IPO transactions than with actual IPOs. 

Moreover, it is not easy to objectively estimate the value of shares at the pre-IPO stage because a privately held company, unlike a public one, does not disclose financial statements.

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Companies in the pre-IPO stage are not required to provide investors with financial information or corporate rights.

Disadvantages of Pre-IPO over IPO

There are risks and downsides to investing in pre-IPO stocks that you should understand. As investors cannot access information about the company’s trades, including financial statements, pitch deck, or final business plans, they take a high risk of indulging in this investment stage. There is a lack of transparency and openness in the private market.

Initial Public Offering (IPO) 

The Initial Public Offering (IPO) is a public issuance in which the shares of a company are sold to investors on a stock exchange. The IPO of a company is usually supported by one or more bank investors and a stock manager who arranges for the shares listed on stock exchanges. The process is commonly known as going public or floating. Following the IPO announcement, a private company becomes a public company.

With the IPO finalised, the company’s shares are issued and traded on the stock exchanges, also called the free market. While the offering offers several benefits, there are also significant costs, especially those related to the system, such as security, banking and legal fees.

Listing

A listing (of a company) refers to the company’s shares being on the list of legitimately traded stocks on a stock exchange. Usually, the issuing company is the one that applies for a listing. Company stocks whose market value and turnover fall below critical levels are often delisted by a stock exchange. Delisting can also result from a takeover or a merger of a company going private.

Each stock exchange has its requirements for a company’s listing, which include: 

Annual financial reports for recent years,
Offering investor benefits at a fraction of the outstanding charges, and
An approved prospectus including opinions from independent assessors.

The Bombay Stock Exchange (BSE), for example, requires a minimum market capitalisation of Rs. 25 core and minimum public float equivalent to Rs. 10 crore for a company to be listed on it. 

So, this is the basic know-how of the public offering process of companies. Before you start investing, start by analysing stocks and shares based on their IPO history and other financial proofs of stability.

Aakash Sharma
Aakash Sharma
Aakash writes on Startup Ecosystem, Policies, Legal and Regulatory aspects of business planning. An alumnus of Delhi University, he is assistant editor at Dutch Uncles.

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