Seventy percent of the human body is composed of water. Thus, every human being needs water for life support.

There are many incidents wherein individuals survived for several weeks by just drinking water.

Trees and plants need sunlight to complete their photosynthesis or their food making process. In addition, it is also an essential element for their growth.

Without sunlight, their chance of survival is very slim even when they are supported with water and necessary soil nutrients.

In the same manner, companies need capital or financial assets to support their day to day business operation. They need to pay the suppliers of the raw materials that they are using to manufacture their products.

They need to pay their employees who helps the company manages its operation. Advertising and other PR stuffs also needs financial support in order to promote their products to the public.

Thus, capital for all companies serves as their “bloodlines”.

Without it, no business operation, and definitely, no generated revenue for the company.

Companies can raise additional capitals that they need to support their business operation as well as possible expansions in various ways. However, one of the more popular ways to raise capital for a company is the IPO or the initial public offering.

It is referred to as the first sale of a company’s common shares to interested public investors. As previously mentioned, it is primarily used to raise additional capital for the company. Keep in mind that this term only refers to the first public issuance of a company’s common stocks.

Any later issuance of common shares to interested public investors is now referred to as a secondary market offering.

Initial public offering of common stocks has proven to be an effective way of raising additional capital for a company, though there are legal compliances and reporting requirements that must be met. The United States is considered to be imposing heavy legal requirements to those companies that will file an IPO for additional capital generation.

Under the Federal Law, all IPO process are governed by the Securities Act of 1993 and laws of the U.S. Securities and Exchange Commission, with each stock exchange has its separate respective rules that every company must follow.

The IPO process generally includes one or more investment banks (financial entities that assist both public and private companies or corporations in raising capital as well as provide strategic advisory services for acquisitions, mergers, and other kinds of financial transactions) as the underwriters. The company will enter a contract with the underwriter to facilitate the issuance of the stocks to the public. The underwriters will be the one to approach investors who are interested in buying those common stocks.

During the early years of the IPO, it is considered to produce a positive mean initial return to the listing companies. In 1965 when the IPO process is still on its first years of operation, there are around 120 companies listed which generates an average initial return of 11.4 percent from the issuance date to the end of the offering month.

IPO analysts recorded an average of 22 percent worth of initial returns on the listed companies from 1965 to 2004. It clearly shows that many investors are interested on purchasing shares through the IPO process. It also illustrates that companies under IPO listing generally provides an additional capital for them.

The initial public offering of common stock during the 1965 era is just a manifestation that the IPO process, despite of the heavy legal requirements that must be made, it is still the most ideal way to issue stocks to the public and raise additional capital for a company’s day to day business operation.

In business, finance, and trade, process is an essential ingredient to complete the recipe of a successful commercial result. It typically involves inputs (pre requisite data that must be entered before any method can be put into place), different methods, and outputs (the expected results once methods have been applied to the inputs).

In addition, it is a collection on interrelated structural activities that generates something of value for a corporate organization, its stakeholders, and/or its clientele. In other words, the process that a corporate organization will adopt will help them realized the services that they are offering to the public.

It works like a cookbook wherein the ingredients are prepared first before proceeding to the step by step procedure of cooking a particular dish or cuisine.

Once the ingredients and the procedures have been satisfied, you will be able to arrive with a very delicious meal which you can enjoy. Such delicious meal represents the achievement of a corporate organization in terms of excellent delivery of products or services to the public and generated revenue for the company.

Process does not limit itself on corporate organizations.

Even external matters require process in order to facilitate smooth flow of the application to the business community. One of which is the initial public offering.

Also referred to as IPO, initial public offering is the first or the initial sale of a company’s common shares to the public.

It is primarily for raising additional capital or funds for a company that will be used to sustain its growing needs (production, distribution, and others). The term merely applies to initial issuance of common shares to interested public investors. Thus, any late issuance of common shares will be referred to as a secondary market offering.

The IPO process involves rules and regulations imposed under different governing laws and bodies, such as the Federal Securities Act of 1993 and the U.S. Securities and Exchange Commission, respectively. In addition, state laws affect the IPO process, though there are exceptions applicable especially of the common shares are listed with a major stock exchange such as the NASDAQ and the NYSE.

The process generally starts with the company selling the common shares to the public (the issuer) to draft a prospectus. Such prospectus contains the details about the company’s history, background, finances, offered products and/or services, industry environment, and other related information. The Securities and Exchange Commission actively scrutinizes the content of individual IPO prospectus before proceeding to approval.

Companies going public typically employ the services of major law firms during the drafting process.

After the SEC approved the prospectus, the prices of the common shares are now finalized and the IPO will now be entered into a “free riding” period. The underwriters, which are composed of several investment banks, will now offer the common shares for sale to the public in various ways. All offers that will be made must have an accompanying copy of the approved IPO prospectus. Any misleading and false statements are strictly prohibited while the offering of common shares for sale within this period is going on.

The executives of the company going on public will be held responsible for any misleading information or omissions on the prospectus. In the same manner, the underwriters will also be held liable if they failed to conduct a reasonable investigation about such misleading information or omissions.

Initial public offering involves a process, which will keep IPO flowing smoothly and protected against individuals or groups who want to take advantage of the process itself.

Supposedly you are one of the members of the board of directors of a certain company. The board realized that there is a need for additional capital infusion since the company registers a consistent growth rate in terms of production and marketing aspects.

Such growth needs to be addressed in order to avoid later problems that may even result to the mismanagement of the company and possible bankruptcy instead of a progressive corporate output.

There are various suggestions raised by your colleagues. Some suggest that since the company has enough funds, it could be used to finance a business loan that will be used to sustain the company’s growth.

Others suggest that the company must go public in order to attract several investors who will infuse the needed capital for the growing operation of the company.

As a member of the board of directors, which way will you pursue? Remember that there are two options that the company can take-first is entering into a loan agreement wherein you need to present any corporate assets as security to the loan. Second, the company could be listed into an IPO or initial public offering, determine the number of shares that the company wants to sell to the public, and the rest will just follow.

Both options can raise revenues, yet the question will not just be about generating additional revenues at all.

The question will now be like this – “Which of them provides an advantage to the company and its stakeholders?”

Let us scrutinize the options carefully by going through the first option. The process is simple – once the company found a lending institution that will agree to lend the company with the needed amount, the company through its high executives and officials will enter a contract with a lending company and make an agreement on the conditions prior to the approval of the loan.

It will include securing any company assets with equivalent value of the loan against the company and monthly repayments within a specified period of time with applied interest.

The second option will involve the initial sale of the company’s common shares to the public. The company will undergo the IPO process under its governing laws, particularly the Federal Securities Act of 1993 and the governing bodies (such as the Securities and Exchange Commission and the exchange where the common shares of the company are currently listed).

Typically, you will spend more or less than $1 million in the whole process, but the initial return of investment is higher than your expenses, since the underwriters (composed of several investment banks) will sell the shares to interested investors higher than its market value.

If you will compare the two options, definitely the initial cost is higher when the company undergoes IPO. The return of investment has yet to be seen after the completion of the process.

In other words, you will be spending first before you earned the revenues that you need. It is contrast with securing a loan since you will be able to get the borrowed capital even before you make any repayments. You will be able to use the funds immediately after the released of the approved loan money.

However, the loan will now be on the “negative” side once you will make repayments to the loan that you availed. Remember that once you failed or faltered on the conditions agreed on the loan, the collateral, which is your company’s assets, will be automatically taken away by the lender. In IPO, the assets will not be at risk. Instead, such assets will increase because of additional capital raised through IPO.

The choice between an IPO and a business loan is up to you. Scrutinize the given options and make the right choice.