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Glossary

IPO: what an initial public offering is

An IPO is the moment a private company's shares become available to the public. It gets headlines, but the SEC calls IPOs risky and speculative investments.

By ChartWise editorial desk4 min read4 sources, 4 primary Fact-checked by a second reviewerUpdated

An initial public offering, or IPO, generally refers to when a company first sells its shares to the public. The company registers the offering with the SEC, usually on Form S-1, and typically lists the shares on a stock exchange.

Quick answer

An IPO generally refers to when a company first sells its shares to the public [4]. The company files a registration statement with the SEC, typically on Form S-1, and usually lists on an exchange such as the NYSE or Nasdaq [2].

A group ringing the opening bell on the podium of the New York Stock Exchange
Photo: "20180926-OSEC-AR-0001" by USDAgov, PDM (edited: cropped, resized, colour-graded).

Key points

  • A company may not sell shares in a registered offering until the SEC staff declares its registration statement effective [1].
  • Underwriters distribute most IPO shares to institutional and high net-worth clients, so most investors buy later in the market [2].
  • The SEC warns that IPOs can be risky and speculative, and that the offering price may bear little relationship to the trading price [2].
On this page

What happens in an IPO?#

Going public typically means a company undertakes its IPO by selling shares of stock to the public, usually to raise additional capital [1]. To do that, it files a registration statement with the SEC, typically on Form S-1, and the filing is public on the SEC's EDGAR database [2]. The company may not sell the registered shares until SEC staff declares the registration statement "effective", and from then on it is subject to Exchange Act reporting requirements [1]. Our guide to SEC filings explains the reports public companies file.

The offering itself is run by underwriters, the investment banks that manage and sell the IPO for the company. Alongside the offering, the company usually applies to list its shares on an established exchange such as the New York Stock Exchange or Nasdaq [2]. After that, the shares trade like any other common stock, and our explainer on how stock exchanges work covers what happens next.

IPO termWhat it means
Form S-1The registration statement most IPO companies file with the SEC
ProspectusDisclosure document; read Risk Factors, Use of Proceeds and MD&A
UnderwritersInvestment banks that manage and sell the IPO
Lock-upInsiders agree not to sell for a period, typically 180 days
Emerging growth companyUnder $1.235 billion in annual gross revenues in its last fiscal year

Sources: SEC bulletin [2], SEC glossary [3].

Can ordinary investors buy shares at the IPO price?#

Usually not many. The SEC's bulletin explains that underwriters and dealers distribute most of the shares in an IPO to their institutional and high net-worth clients [2]. Investors who do not get shares at the offering price can buy them when they are resold in the public market in the days after the IPO [2].

That later price may differ from the offering price. The SEC warns that the offering price may bear little relationship to the trading price of the securities [2].

What are the risks of buying an IPO stock?#

The SEC is blunt: by their nature, IPOs can be risky and speculative investments [2]. Three risks stand out in its bulletin.

Limited trading history. The offering price may bear little relationship to the trading price [2], and a new public company has no trading history to compare against. Read more on volatility.

Lock-up expiry. Insiders often agree not to sell for a period, typically 180 days [2]. When lock-ups expire, the share price may decline significantly if a large number of shares become available for sale at once [2].

Control. In a dual-class structure, a holder of super-voting common stock can control the company without owning a majority of its shares [2].

Before buying, read the prospectus. The SEC points investors to the Prospectus Summary, Risk Factors, Use of Proceeds, Management's Discussion and Analysis, and the financial statements [2].

Frequently asked questions#

Why do companies go public?

Often to raise capital. The SEC says a company is often seeking to access the capital markets to fund future growth and expansion [2], and going public is usually done to raise additional capital [1].

Does SEC registration make an IPO safe?

No. Registration means the company filed the required disclosure and the SEC staff declared the registration statement effective before any sale [1]. The SEC itself still warns that IPOs can be risky and speculative investments [2].

Where can I read an IPO prospectus?

Registration statements and prospectuses are filed with the SEC and are publicly available on EDGAR [2].

The bottom line#

An IPO is a company's first sale of shares to the public, registered with the SEC and usually followed by a stock exchange listing. Most shares at the offering price go to institutional and wealthy clients, and the trading price that follows may bear little relationship to it. Read the prospectus, note the lock-up date, and remember that the SEC calls IPOs risky and speculative. Then see what you would actually own in common stock.

Sources

  1. Going public | SEC.gov. U.S. Securities and Exchange Commission.
  2. Updated Investor Bulletin: Investing in an IPO. U.S. Securities and Exchange Commission (Investor.gov), 2022.
  3. Glossary (SEC Office of the Advocate for Small Business Capital Formation). U.S. Securities and Exchange Commission.
  4. Initial Public Offering (IPO) | Investor.gov. U.S. Securities and Exchange Commission (Investor.gov).

Education only. This page is not investment, tax or legal advice. Stocks can lose value. See our risk disclosure.

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