How an Initial Public Offering Works: The IPO Process Step by Step

An initial public offering, or IPO, is the first time a company sells its stock to the public through a registration statement filed with the Securities and Exchange Commission, usually alongside listing the shares on an exchange such as Nasdaq or the New York Stock Exchange. The company raises money, existing owners gain a market in which they can eventually sell, and the company takes on a set of public reporting duties that continue for as long as it stays public.

The SEC’s guidance for small businesses puts the legal core simply: if a company decides to conduct a registered public offering, the Securities Act requires it to file a registration statement with the SEC before it may offer its securities for sale, and it may not sell the securities until the staff declares the registration statement effective. Everything else in the process, from hiring bankers to the road show, is built around that sequence.

In brief

• A company prepares audited financials, governance and disclosure, and chooses underwriters before it files.
• It can submit a draft registration statement for confidential review, then must file publicly before marketing begins.
• The offering price is typically set at the end, after investor meetings, and is reported in a final prospectus.
• After the IPO the company becomes subject to Exchange Act reporting and the listing rules of its exchange.

Why companies go public, and what it costs

The SEC lists several reasons companies go public: to raise capital and broaden future access to it, to increase liquidity for owners and employees, to use stock to acquire other businesses, to attract and compensate employees with stock and options, and to build publicity or brand awareness. It also lists the costs. An offering takes time and money. The company takes on significant new obligations to file reports and keep the market informed, which require management time and add expense, and it may be liable if those obligations are not met. It may lose some flexibility, particularly when public shareholders must approve actions. And information that was private, such as financial statements and material contracts, becomes available to the public, including competitors.

Those trade-offs are why many companies stay private longer, raise money through private placements, or consider alternatives to a traditional IPO. The rest of this guide describes the traditional path.

Step 1: Preparing the company

Before any document is filed, the company assembles what the registration statement will require. The registration statement has two principal parts, according to the SEC. Part I is the prospectus, the legal offering document that must be delivered to everyone who is offered or buys the securities. It must describe the business, financial condition, results of operations, risk factors and management, and it must include audited financial statements. Part II contains additional information and exhibits that the company does not have to deliver to investors but must file with the SEC.

The basic form is Form S-1, which any company may use. Non-financial disclosure follows Regulation S-K, and the form and content of financial statements follow Regulation S-X. In addition to what the form expressly requires, the company must provide any other information necessary to make its disclosures not misleading. In practice preparation means audits that meet SEC standards, the corporate housekeeping that public company governance requires, and a review of contracts, related-party dealings and risks that will have to be disclosed.

Smaller and newer companies can use scaled rules. The SEC describes an “emerging growth company” as one with total annual gross revenues of less than $1.235 billion in its most recently completed fiscal year that had not sold common equity securities under a registration statement as of December 8, 2011. Such a company may provide audited financial statements for two fiscal years instead of three, include less extensive narrative disclosure, skip the auditor attestation on internal control over financial reporting, and use test-the-waters communications. It keeps the status for the first five fiscal years after the IPO unless it crosses certain thresholds sooner, such as becoming a large accelerated filer.

Step 2: Choosing underwriters and advisers

Most IPOs use one or more investment banks as underwriters. They advise on structure and timing, help with the prospectus and the investor presentation, and market the shares. The company also engages securities counsel, independent auditors and often a transfer agent. The underwriting terms, including compensation, are described in the prospectus under the plan of distribution. The managing underwriters later join the company in asking the SEC staff to accelerate effectiveness.

Step 3: Confidential review, then public filing

The staff of the SEC’s Division of Corporation Finance reviews registration statements. Its filing review page says the Division selectively reviews transactional filings, such as those for public offerings, and that the review concentrates on disclosures that appear to conflict with SEC rules or accounting standards, or that appear materially deficient in explanation or clarity. The page adds that the Division does not evaluate the merits of any transaction or decide whether an investment is appropriate for any investor, and that responsibility for complete and accurate disclosure lies with the company and others involved in preparing it.

The staff accepts draft registration statements for nonpublic review. This began with emerging growth companies under the JOBS Act and, since 2017, has been open to all issuers. For an IPO, the staff will continue nonpublic review if the issuer confirms in a cover letter that it will publicly file its registration statement and its nonpublic draft submissions at least 15 days before any road show, or at least 15 days before the requested effective date if there is no road show. Comment letters and issuer responses are released on EDGAR no earlier than 20 business days after effectiveness. Under a March 2025 update, an issuer may omit underwriter names from its first draft submission, as long as it names them in later submissions and public filings.

The company typically responds to staff comments by amending the filing. The Division completes many filing reviews without issuing comments, and where it does comment it may issue further comments after reading the company’s response. When the company files publicly, the registration statement and prior drafts become visible on EDGAR.

Step 4: Communications during the offering

The Securities Act restricts what a company can say about an offering while it is in registration. Two exceptions come up often. Rule 135 allows a limited notice of a proposed registered offering, with a legend that it is not an offer and a restricted list of content, such as the issuer’s name, the title and amount of the securities and the anticipated timing. And Rule 163B allows an issuer or someone authorized to act for it to talk with qualified institutional buyers and institutional accredited investors to gauge their interest in a contemplated registered offering, before or after filing. Those communications are treated as offers, but the rule exempts them from certain Section 5 restrictions. Emerging growth companies have a similar statutory test-the-waters permission.

Because communications are tightly constrained, companies usually keep the story in the prospectus and avoid unplanned publicity.

Step 5: Marketing and pricing

After the public filing, the preliminary prospectus circulates with a price range and the underwriters organize a road show, a series of meetings in which management presents to prospective institutional investors. Indications of interest from those meetings help the underwriters and company judge demand and set the price.

The final price is usually not in the registration statement when it becomes effective. Rule 430A permits the prospectus in an effective registration statement to omit the offering price, the underwriting syndicate and compensation, proceeds and other items that depend on the price, provided the securities are offered for cash and the omitted information goes into a prospectus filed under Rule 424(b). Under Rule 424(b), that prospectus is generally due no later than the second business day after the earlier of the pricing date or first use. The instruction to Rule 430A also lets certain changes in volume or price be disclosed there rather than in a new amendment, within a 20% cap on the change in the maximum aggregate offering price shown in the fee table.

The request for effectiveness goes to the staff under Rule 461. The registrant and the managing underwriters make it, and the rule states a general policy of permitting acceleration upon request as soon as possible after appropriate amendments are filed, having regard to the adequacy of public information, the investor’s ability to understand the securities and the public interest.

Step 6: Listing, closing and trading

A company that lists on Nasdaq or the NYSE must satisfy that exchange’s listing standards. The SEC notes that these include rules on corporate governance and audit committees. The exchange reviews the listing application and approves the shares for trading. When the registration statement is effective and the offering has priced, the underwriters allocate shares, the sale closes, and the stock begins trading on the exchange. How the stock trades after that is a function of the market and not of the process described here.

Step 7: Life as a public company

After an IPO, the SEC says, once the registration statement is effective the company becomes subject to Exchange Act reporting requirements. That means periodic reports, current reports on significant events, proxy statements and annual meeting requirements, reporting by officers, directors and 10% shareholders, and compliance with the Sarbanes-Oxley Act. A company that wants to stop reporting later must follow the SEC’s rules for suspending reporting obligations. These duties are ongoing and the cost of compliance continues, which is one reason the decision to go public is long-term.

Common misconceptions

“The SEC approves the offering.” The staff reviews disclosure. It does not endorse a company or its price.

“Only large companies do IPOs.” Smaller companies can go public, using scaled disclosure where available, though the costs and obligations described above still apply.

“The IPO price is set months ahead.” The final price is typically set after the road show and reported in the Rule 424(b) prospectus.

“After the IPO, the work is done.” Public reporting obligations begin on effectiveness and continue.

FAQ

How long does an IPO take?

There is no fixed timeline. The process depends on preparation, the staff’s review and market conditions. The one fixed point is the 15-day public filing requirement before the road show for companies using confidential review.

What is a road show?

A series of presentations by management to prospective investors, mainly institutions, after the preliminary prospectus is available. It helps the underwriters gauge demand before pricing.

Do all IPOs list on an exchange?

Most IPOs of operating companies seek an exchange listing, which requires meeting the exchange’s listing standards. Companies whose securities are not listed may trade on other marketplaces, such as OTC Markets Group, which have different requirements.

What is the difference between a registered IPO and a private placement?

A registered IPO sells securities to the public under a registration statement declared effective by the SEC. A private placement relies on an exemption from registration and is usually limited to certain investors.

Can individual investors participate in an IPO?

Allocation is decided by the issuer and its underwriters. Retail access varies by offering and by broker. Anyone considering a purchase should read the prospectus, which must be delivered to buyers of the securities.