Initial Public Offering - IPO

An IPO (Initial Public Offering) is the first time—or cleverly named "initial" time—when a company sells its stock to the public.

Why is this such a big deal when companies sell shares to private investors all the time, raising various funding rounds for growth? Because the legal strictures in selling shares to the public require massive paperwork, disclosure, and legal and accounting conformance in documentation.

Why all the paperwork when selling to the public? Because Ma and Pa Kettle bought the Brooklyn Bridge 14,000 times before regulators created disclosure laws and grew any kind of teeth in the manner in which they policed bad actors. And we don't just mean Keanu Reeves.

The process revolves around a middle man, known as an underwriter, who stands behind the accuracy of the reporting of the company's numbers and then remains responsible for marketing those shares to mutual funds, hedge funds, and other places where wealthy people buy public stocks with risk.

Example:

Whatever.com has 40 million shares outstanding after 3 private rounds with venture capitalists and private investors. It wants to raise money to go big internationally, and for the first time, it will offer shares to Joe and Jill Public. And that means that all of its shares will be tradeable publicly on the open market. That is, the insiders, early investors, founders, etc. will be able to just call their broker at Schwab or Fidelity or wherever and sell their shares get liquidly, and buy themselves a Maserati.

So whatever.com sells 10 million shares at 12 bucks each to raise $120 million, which they can spend to build out offices all over the world. So, yeah. That’s an IPO, and that’s why a company generally wants to make shares available to the public. Because once you’ve made an initial public offering, and you make money off the sales of your stock...you can buy as many fancy cars as you like.