An IPO (initial public offering), or new issue, is a process by which a company’s security is offered for sale to investors for the first time. A private (privately held) company intending to g public can raise capital by issuing securities to the public through the primary market. In an initial public offering (IPO), it is the company’s shares, not the shareholders’ shares, which are sold to investors, and the sale proceeds go to the company to finance its future growth. When a company plans to go public, it first has to select one or more investment banks as underwriter or co-underwriters for the offering.

IPOs, per se, are a type of book building (in addition to accelerated book building and reverse book building). As a process, it involves  collection of information about investors’ intentions as to the volumes they are willing to have and the prices they are willing to offer for a security. Book building is typically customized to an issuer’s needs, and constitutes one of the most common methods used for public offerings. It is designed to provide both the company (issuer) and the investment bank a solid ground for a successful offering. The bank marketing an offering gathers this information about investors’ intentions as to required quantities and corresponding offer prices. Book building is a method of pre-market price discovery for initial public offerings (IPOs) and secondary offerings.

There is a host of risks associated with IPOs, particularly including:

• Market volatility: prices in the stock market can experience high volatility, including those related to IPOs. Fluctuations may give rise to huge losses for investors/ holders of the issued securities. High volatility, in the first stage, may also result from lack of information about the issuer’s operations and business potential.
• Insider trading: directors and persons in charge of the process may exploit their access to confidential information to their own benefit.
• Overvaluation: an issue may be overvalued in reaction to certain expectations or information floated to the market.
• Regulatory compliance: public companies are subject to stringent regulatory requirements, which may create huge costs in terms of financial resources and time, etc.
• Focus: going public can divert companies from their long-term objectives (growth, market share), to rather focus on short-term goals (e.g., meeting quarterly earnings targets).
• Potential loss of control: going public implies that the company’s ownership is diluted (from the perspective of its founders or original owners), and the founders’ control over the company may deteriorate.