The term IPO refers to the Initial Public Offering of stock made by any company that wishes to make ownership shares available to the public for open trading on the stock market. The average investor typically can’t purchase any shares of a privately held company because such companies have a small number of private shareholders that own and control the business. When the company decides to “go public”, this means it has decided to allow shares in the company to be made available to public traders. To do this, it must make an IPO, or an Initial Public Offering, that typically contains all of the information about the company. A company who is making an initial public offering has a wide array of legal requirements to fulfill.
A company that issues an IPO has to offer a piece of itself and its profits with every share that is purchased. The amount that a buyer receives with every share must also be disclosed in the IPO, because any investor, by law, must be informed of every aspect of the transaction before the transaction may take place. There are many different accounting disclosures that must take place during the IPO process. Details about the profits, losses, debts, assets, management and operations of the company, among other things, must all be carefully disclosed.
Most rules for IPOs are set by the Securities and Exchange Commission although there may also be supplemental rules that apply as well. Accountants and lawyers are both involved in the process to ensure that all legal requirements are complied with. An initial price is set at which shareholders may buy stocks, and usually only a limited number of shareholders are actually given the opportunity to purchase these initial shares. The company also has to decide exactly how many shares they want to make available, i.e. how much they want to dilute the ownership stake.