Initial Public Offerings can be among the most exciting opportunities available to investors, especially in the age of tech startups with red-hot growth, and they also come with increased risk. But what exactly are they, and how can retail investors participate?
Private companies that need capital can raise it by selling shares in the company to investors in what is known as an initial public offering or IPO. An IPO is one method companies may use to raise capital and is a direct path to trading on a U.S. stock exchange, where stocks can be traded publicly. In exchange for selling a piece of the company to the public, it can boost its profile and get cash to grow.
For investors, IPOs can provide an opportunity to purchase shares before a company begins trading publicly. Some investors participate in IPOs in hopes the company’s value will grow over time, but IPO investments also involve significant risks, including price volatility and uncertain performance after the stock begins trading. As with any investment, it’s important to carefully consider both the potential opportunities and risks before investing in an IPO.
The IPO process involves several steps. In order for a company to go public, it is required to file a prospectus with the U.S. Securities and Exchange Commission. In the filing, which the company uses to inform investors, it lays out all the key information about the business, including its financial history, current revenue and debts, potential risk factors and plans for the newly raised capital. It also lists the details of the offering. A company will typically hire an investment bank or bankers to act as underwriters or buyers of the shares before selling them to the public. The underwriter helps the company come up with the offering price, the number of shares to be sold and the timing of the listing. The company also has to select whether it wants to list on the New York Stock Exchange or the Nasdaq Stock Exchange.
Who gets IPO shares? Typically, the underwriters offer IPO shares to institutional investors and company insiders. It’s often a complicated and selective process because underwriters want to sell IPO shares to individuals who will remain long-term investors. If it is a popular company, an IPO can become oversubscribed, which means there are more investors than shares. Some IPOs will have a lock-up period during which IPO investors are not allowed to sell shares, ranging from 90 to 180 days.
Not everyone can purchase shares in IPOs, although it’s a lot easier now than it was years ago. That credit goes to digital platforms like SoFi, which allow everyday investors to request IPO shares with no account minimums. SoFi may participate in certain IPO offerings through relationships with underwriters and other market participants, acting as part of the underwriting syndicate to distribute shares to retail investors. SoFi Securities provides eligible members access to IPOs by allowing users to browse upcoming offerings directly in the app, review the prospectus and submit an Indication of Interest to request a specific number of shares before the company begins public trading.
When it comes to investing in IPOs, there are pros and cons. The pros include early access to a company with growth potential, potential for significant price movements, liquidity, portfolio diversification, and transparency from SEC filings. The cons include volatility, the risk that not every company becomes a giant, limited operating history, downward pressure after lock-up expiration, and potentially unsustainable valuations.
Before investing in an IPO, it's important to do your due diligence. That means reading the entire prospectus, understanding the company's business model, revenue streams, competition, valuation compared to peers, and risk factors. Also, check what the company plans to use the proceeds for. IPO investing is a way to get in on a company before it trades on the public market. Platforms such as SoFi now provide retail investors with access to certain IPO offerings. To learn more about IPO investing through SoFi Securities and to get started, click here.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of losing principal.
