Selling New Stock

Going public, or taking a company public, means making it possible for outside investors to buy the company's stock. To go public, the management registers the stock with the Securities and Exchange Commission (SEC) and makes an initial public offering (IPO).

FROM PRIVATE TO PUBLIC
OWNERSHIP
The road to public ownership often begins with an entrepreneur who has come up with an idea for a product or service and borrows enough money to launch a start-up business. If the company grows, the entrepreneur may be able to raise funds for expansion in the private equity market.

There, wealthy investors, investment companies, or other groups pool money — called venture capital — that they're willing to risk on a new business in exchange for a role in how the company is run and a share of the potential profits.

GOING PUBLIC
If a small company finds its product or service in great demand, it outstrips the ability of venture capitalists to provide money for rapid growth. That's when it decides to go public.

First, the management goes to investment bankers who agree to underwrite the stock offering — that is, to buy all the public shares at a set price and resell them to the general public, hopefully to great demand.

The underwriters help the company prepare a prospectus, a detailed analysis of the company's financial history, its products or services, and its management's background and experience. The prospectus also assesses the various risks the company faces.

ATTRACTING INVESTORS
The proposed stock sale is publicized in the financial press. The ads are commonly known as tombstones because of their black borders and heavy print.

The underwriters may also organize meetings between the company's management and institutional investors, such as pension or mutual fund managers. The day before the actual sale, underwriters price the issue, or establish the price they will pay for each share.

When the stock begins trading the next day, the price can rise or fall depending on whether investors agree or disagree with the underwriters' valuation of the new company.

SELLING DIRECT
Some companies may make a direct offering to investors, by selling shares in an online auction format . This type of offering may save money by eliminating fees paid to underwriters, and it may result in the issuer making more money from the offering itself. Companies who do an IPO this way still must meet the SEC's filing rules.

One drawback of direct offerings that aren't listed on an exchange or market or followed by market analysts is that trading is often thin, or infrequent. That may limit investor interest in the stock. But that's not an issue for major companies who choose to go public this way.

SECONDARY OFFERINGS
If a company has already issued shares, but wants to raise additional capital, or money, through the sale of more stock, the process is called a secondary offering.

Companies are often wary of issuing more stock, since the larger the supply of stock outstanding, the less valuable each previously issued share becomes. That's known as dilution.

For this reason, a company typically issues new shares only if its stock price is high. If it needs money, it may decide instead to issue bonds, or sometimes convertible bonds or preferred shares.

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