Initial Public Offerings (IPOs) and Follow-on Public Offerings (FPOs) are two of the most popular ways that companies raise funds from the public. Both involve the issuance of securities to the public, but they differ in several ways. In this article, we will explore the key differences between IPOs and FPOs, and the advantages and disadvantages of each.
What is an IPO?
An Initial Public Offering (IPO) is the first time a company offers its shares to the public. This usually happens when a private company decides to go public and list its shares on a stock exchange. In an IPO, the company sells a portion of its shares to the public and raises funds. The shares are typically sold to institutional investors, high net worth individuals, and retail investors through a public offering.
Advantages and Disadvantages of IPOs
IPOs have several advantages and disadvantages. The main advantages of IPOs are:
- Access to Capital: An IPO allows a company to raise significant amounts of capital from the public, which can be used to fund expansion, research and development, and other initiatives.
- Increased Visibility: Going public can increase a company’s visibility and reputation, which can help attract customers, employees, and business partners.
- Liquidity: Once a company goes public, its shares can be easily bought and sold on the stock exchange, providing shareholders with liquidity.
However, IPOs also have some disadvantages, including:
- Costs: An IPO is an expensive and time-consuming process that involves several legal, accounting, and underwriting fees.
- Loss of Control: Once a company goes public, it is subject to the scrutiny and regulations of the stock exchange and securities regulators, which can limit the control of the company’s management.
- Short-term Focus: Public companies are often under pressure to deliver short-term results to meet the expectations of shareholders and analysts, which can limit their ability to pursue long-term goals.
What is an FPO?
A Follow-on Public Offering (FPO) is a secondary offering of shares made by a public company that has already gone through an IPO. In an FPO, the company issues new shares to the public and raises additional funds. FPOs are typically used by companies to finance growth, pay down debt, or fund acquisitions.
Advantages and Disadvantages of FPOs
FPOs also have several advantages and disadvantages.
Advantages of FPOs are:
- Access to Capital: An FPO allows a company to raise additional funds from the public without going through the entire IPO process again.
- Lower Costs: FPOs are typically less expensive and time-consuming than IPOs, as the company has already gone through the IPO process and has an established relationship with underwriters and regulators.
- Flexibility: FPOs can be structured in different ways, such as rights offerings, which allow existing shareholders to purchase additional shares at a discounted price.
Disadvantages of FPOs are:
- Dilution: FPOs can dilute the ownership of existing shareholders, as new shares are issued and sold to the public.
- Market Conditions: FPOs are subject to market conditions, and the company may not be able to raise the desired amount of funds if the market is unfavorable.
- Regulatory Scrutiny: FPOs are subject to the same regulations and requirements as IPOs,
- which can increase the cost and time required to complete the offering.
Key Differences between IPOs and FPOs
IPOs and FPOs differ in several ways, including:
- Timing: IPOs are the first time a company goes public, while FPOs are subsequent offerings made by a public company.
- Purpose: IPOs are typically used by private companies to raise capital and go public, while FPOs are typically used by public companies to raise additional funds.
- Underwriting: In an IPO, the underwriter is responsible for purchasing the shares from the company and selling them to the public. In an FPO, the underwriter is only responsible for selling the shares to the public.
- Regulatory Requirements: IPOs are subject to more stringent regulatory requirements than FPOs, as the company is going public for the first time.
- Costs: IPOs are typically more expensive than FPOs, as the company has to go through the entire IPO process, including legal, accounting, and underwriting fees.
Which is better – IPO or FPO?
Whether an IPO or FPO is better for a company depends on several factors, including the company’s financial goals, market conditions, and regulatory requirements. In general, IPOs are more suitable for private companies that want to go public and raise significant amounts of capital, while FPOs are more suitable for public companies that want to raise additional funds without going through the entire IPO process again.
Knowing when to sell is much harder than knowing when to buy.
Naved Abdali
Conclusion
IPOs and FPOs are two of the most popular ways that companies raise funds from the public. While both involve the issuance of securities to the public, they differ in several ways, including timing, purpose, underwriting, regulatory requirements, and costs. Whether an IPO or FPO is better for a company depends on several factors, and companies should carefully consider their financial goals, market conditions, and regulatory requirements before deciding which option to pursue.
