The term “offering” refers to a process of making it possible for a company’s stocks and shares to be bought by investors. It usually means the process of initial public offering (IPO), but other kinds of offerings also exist, for instance, seasoned equity offering, secondary market offering, and some others, which are also worth studying.
An offering of assets as a part of raising funds for a young company always implies their further sale to the investors, and that is its distinctive feature which sets it aside from other forms of funding, which might not include selling a company’s shares.
Offering as IPO (initial public offering)
As it has been stated above, the most commonly mentioned process of offering is the initial public offering. In this case, a company that had previously been private proposes its shares and stocks to the investors for the first time, i.g. becoming a public one. It is a complex procedure, involving several steps and participants. A company usually goes through the initial public offering to raise funds for further development, pay off the first private investors, and draw more profits to the company owners.
To start an initial public offering, a company usually engages an investment bank for presenting the stocks on the market and carrying out necessary formalities. An investment bank usually acts as an underwriter, although more than one underwriter might be recruited. The process of IPO also requires the participants of lawyers, public accountants and a government institution. For the US, that institution is the Securities and Exchange Commission.
In the beginning, securities of the company must be thoroughly assessed and measured, and a list of documents must be prepared. Documents required for the procedure might vary by jurisdiction, but they usually include a document called a prospectus, which reflects many aspects of the company’s activities and securities. In some cases, a special type of prospectus is also prepared, providing information on the planned issuing of different types of securities in the future.
After the documents reflecting all the relevant information on the company are prepared, they are made public for the government and potential investors. That is done to clear up all possible issues on stocks being traded, and attract possible purchasers. After the required documents are filed, and the official audit is conducted, the actual date of the initial public offering is set. In the end, the company’s stock and shares become publicly available for purchase, and are freely traded to investors. The company becomes public.
IPO possible risks
Although an initial public offering implies profits and possible raise of funds, it also poses risks to the company and potential investors. From the company’s perspective, the process of IPO might take a long time and be resource-consuming, and there’s no guarantee that profits gained as a result will pay off the expenses. Additionally, the required disclosing of details of the company activities might be a sensitive issue in some cases.
From an investor’s point of view, it might be risky to purchase assets of a new company, as there isn’t usually enough information for a careful studying of the company’s performance over the time. It’s difficult to predict their future prospects, and there’s a high risk of losses. This disadvantage becomes even more clear if a company goes through the initial public offering because of liquidity issues, trying to attract more resources. In this case, companies often have a transitional period of growth with uncertain future prospects or even some significant problems.
Other instances of Offering in finance
An offering as a process of putting the securities up for sale doesn't always mean the securities are traded by the newly public company for the first time. In fact, most securities are sold and bought in the market many times, and go through more than one offering.
There are several types of offerings, with two most common being the following:
- A seasoned equity offering, when a public company issues new securities to be traded in the stock market. The key difference from the initial public offering is that the issuing company doesn’t go public by issuing the securities in question, because the company has already been made public before that.
- A secondary market offering, when no new shares or stocks are created, but instead the previously issued ones are again proposed for sale in the market. In this case, the company that initially issued the stocks in question doesn’t always participate in the process, and the stock is often sold between investors. Those secondary offerings are not as complicated as the initial public offering, as it doesn’t require as many preparations to be executed.
There are also alternative forms of public offerings existing in finance. One of those forms is an alternative public offering, which is, in fact, a process of an acquisition of a private company by a public company to allow the former private company to go public faster and easier, which is the main advantage of such a procedure, though disadvantages also exist.
One more possible option is a direct public offering, which is similar to an initial public offering in many aspects, but lacks the involvement of an investment banking organization, allowing the company to reach the public directly if all the requirements are fulfilled. This type of the public offering is often utilized by small companies and non-profit organizations, which need to raise funds quickly and directly from a certain group of already known investors. This process might be considered as a form of crowdfunding. Nevertheless, there are some significant differences between crowdfunding and the direct public offering, as the latter is still a legally regulated and registered process.