What is an IPO?

An Initial Public Offering (IPO) is a process in which a private company sells its business’s crypto assets to the public in a new issue.

IPOs are usually for established businesses that sell shares as a way to raise capital. In contrast, ICOs are used as a fundraising mechanism that allows companies to raise capital for their projects at a very early stage.

What is the purpose of an IPO?

This process allows a crypto company to raise capital from public investors, but it will have to comply with regulations that force it to increase publicity and transparency.

Companies often issue IPOs to raise capital to pay off debts, fund business development initiatives, and more.

Private investors have the opportunity to realize income from their investments. The public has the opportunity to invest their funds in a proven business model.

The benefits and drawbacks of an Initial Public Offering

Possibility of raising funds

Companies can use an initial public offering to fund research and development, hire new employees, construct buildings, reduce debt, finance capital expenditures, purchase new technology or other companies, or pay the bank for any other possibility.

The amount offered by an IPO is crucial and can change a company’s growth trajectory.

Capital exit opportunity

An initial public offering of shares is a “profit-making” opportunity for stakeholders whereby they can receive large sums of money, or at the very least, lock in the little capital they currently have in the company.

Initial public offerings usually raise a lot of money, which makes them very attractive to founders and investors.

Publicity and dependability

IEOs are often more trustworthy than projects funded by ICOs. For the project itself, the benefit of the IEO model is clarity, as they can access the exchange’s existing user base and marketing resources.

Limitations: Tradeoff when doing an IPO

Many additional regulations

Public companies are required to file their annual financial statements with the Securities and Exchange Commission (SEC).

These SEC regulations are both burdensome and expensive. Publicly reporting a company’s financial position requires it to:

Establish tighter financial controls.

Hire financial reporting staff and audit committees, and conduct quarterly and annual financial audit processes. Hire an audit firm and complete many other related tasks.

These jobs cost public companies millions of dollars a year and require thousands of hours of labor.

The possibility of losing control

Since shareholders have provided the company with so much money, they expect the company to act in their best interest. If shareholders feel the company is not operating in a way that makes them money, they will force the company, through shareholder vote or public criticism, to appoint new management.

Transaction expenses

IPOs are very expensive. In addition to the recurring costs of public company regulatory compliance, IPO transactions come at an expensive cost.

The biggest cost of a public offering is the cost of underwriting, which will typically charge between 5% and 7% of the total proceeds.

In addition to the underwriting fee, companies will have to spend about $1.5M-$2M for legal fees, another $1M for audit fees, and $500K for registration and printing fees. Transaction costs will be even higher if a company chooses to hire financial reporting advisors or other specialized groups.

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