1. Introduction

The shares of the overwhelming majority of all companies cannot be traded freely, as these companies are privately held. In the U.S., for example, there are approximately 6 million companies according to the United States Census Bureau, but only less than 4'000 of them have their shares directly listed on a public stock exchange. Therefore, in the U.S., less than 1 out of 1'500 companies makes its shares available to a broader investment base!

   

The process through which a private company lists its shares on a public stock exchange and thereby becomes a publicly traded (and owned) company is generally referred to as "Going Public." The numbers above indicate that going publics are comparatively rare corporate events and that very few companies ever make it to the public stage. Yet because public offerings often involve relatively well-known companies and are heavily advertised, they are generally accompanied by significant media and market attention. For example, Facebook's initial public offering on Friday, May 18, 2012 was the news of the day.

The purpose of this module is to take a closer look at these fascinating transactions that convert private firms into public firms. The module proceeds as follows:

  • This introductory section starts with a brief market overview for going public transactions.
     
  • We then investigate why firms go public and discuss various advantages and disadvantages of public corporations.
     
  • We present the process of the Initial Public Offering (IPO), the typical way of going public using an underwriting syndicate of investment banks that support the firm in the marketing, pricing, and distribution of its securities. This section allows us to take a careful look at many important aspects of IPOs, in particular:

    • The many roles that investment banks have in the process.

    • How to dismantle information asymmetry between the firm and the investing public.

    • The two main ways of pricing securities via Bookbuilding or Dutch Auction.

    • A phenomenon called "Underpricing" to attract investors on the primary market.

    • The actual cost of an IPO.

       
  • We present a simple framework that allows us to understand how IPOs affect the value allocation and ownership structure of a company and why IPOs could be beneficial compared to other forms of financing.
     
  • Since an IPO is rather costly and only open to a small fraction of all firms, we investigate alternative ways to tap into public markets. In particular:
    • Direct Listings, where firms "simply" list existing shares without raising any fresh capital.
    • Direct Public Offerings, where firms sell shares to public investors without subsequently listing them on a stock exchange.
    • Crowd Financing via virtual platforms on which entrepreneurs and investors meet.
    • Initial Coin Offerings (ICOs), where firms issue crypto assets either in the form of utility tokens to operate specific platforms or security tokens that are backed by external assets (e.g. shares of common stock).