Going public through an initial public offering

Since an initial public offering involves an investment banker to raise capital, a company can typically only pursue an initial public offering when it is large, well-known or growing very rapidly. This is because an investment banking firm makes their money by raising capital and earning a commission. Your company needs to be large enough or interesting enough for an investment banking firm to feel confident their investors will invest when ready.



Sometimes, an investment banker will engage to represent a company and then find out that investor demand is less than anticipated. In that situation, the investment banker can force the offering price lower or cancel the public offering altogether due to a "market out" clause. Generally, investment bankers do not provide their clients with what's called a "firm commitment" which means that they will write a check if their investors do not.



When an initial public offering is repriced due to insufficient investor demand or canceled entirely, the impact to the company going public can be devastating. Aside from not receiving the anticipated funding or receiving it at a higher cost, there is often some damage to corporate credibility and potentially brand image. Therefore, companies that plan to go public through an initial public offering are dependent on the investment banking firm.



In addition to relinquishing a great deal of control over the process of going public, investment banking firms present another hurdle in that they often will not even consider helping small or medium sized companies go public. Finding a reputable licensed broker to facilitate a private or public offering for a small to medium sized company is extremely difficult and often not impossible.