Who Gets the Money from an IPO: A Comprehensive Guide

Understanding the intricate details of an Initial Public Offering (IPO) is crucial for any investor or entrepreneur planning to go public. An IPO is a significant event that involves a public limited company raising funds through the issuance of shares to the general public or underwriting banks. While the process might seem straightforward, the intricacies of who receives the money and how it is distributed can be complex. This article delves into the different stakeholders involved in an IPO and how the proceeds are allocated.

Understanding Initial Public Offerings (IPOs)

An Initial Public Offering (IPO) is a process by which a private company offers its shares for purchase by the general public or underwriting banks. This act of going public is a critical milestone for companies, as it allows them to tap into the capital markets and raise funds for various purposes. The proceeds from an IPO are mainly intended for the issuing company, but there are various stakeholders who also play significant roles in the process.

The Role of Underwriters in IPOs

One of the key players in an IPO is the underwriter, typically an investment bank that helps sell the company's shares to the public. The underwriting process involves the underwriter buying the shares from the company at a discount and selling them to investors. The income from this process is crucial for the underwriter, who usually receives a fee for their services. Typically, the underwriter's fee ranges from 5% to 7% of the total proceeds from the IPO.

How IPO Proceeds Are Allocated

When a company goes public, it receives the money raised from the sale of its shares. The allocation of these funds is as follows:

The Issuing Company: The vast majority of the proceeds from an IPO go to the issuing company. These funds are used for various purposes such as expanding the business, repaying debts, or investing in new projects. The exact amount received by the company can be calculated by subtracting the underwriting fees and other expenses from the total proceeds. The Underwriters: The underwriters receive a fee for their services, which is typically a percentage of the total proceeds. As mentioned, this fee is usually around 5% to 7% of the total proceeds. The underwriter’s fee is payable upfront and can be significant, especially for large IPOs. The fee is listed in the IPO’s Registration Statement/Prospectus. Expenses: Other major expenses incurred during the IPO process include fees for SEC counsel and auditors. These professionals provide invaluable legal and accounting services, and their fees can run into millions of dollars for large IPOs. The expenses are also disclosed in the Registration Statement/Prospectus.

Understanding the Prospectus

The IPO’s Registration Statement/Prospectus is a crucial document that provides detailed information about the company and the process of going public. It lists all the proceeds from the IPO and the fees paid to the underwriters for marketing the shares. These documents are available for public scrutiny at the SEC website, SECGov.

Conclusion

The distribution of the proceeds from an IPO is a complex process involving various stakeholders. The issuing company receives the majority of the funds raised, while underwriters and other professionals receive fees for their services. Understanding these nuances can help investors and entrepreneurs navigate the IPO process more effectively.