Initial public offering (IPO)

An IPO takes a privately held company public. The company — the issuer — sells newly created shares to investors and receives the proceeds, which is what makes an IPO a primary market transaction. Once the offering is complete, those shares change hands between investors in the secondary market, and the issuer receives nothing further from that trading.

The process follows a fixed sequence. The issuer selects an underwriter and files a registration statement with the SEC. A cooling-off period of at least 20 days follows, during which the underwriters may distribute a preliminary prospectus (the red herring), gather non-binding indications of interest, hold due diligence meetings, and publish a tombstone advertisement — but may not sell anything or accept money. The SEC reviews the filing for full and fair disclosure; it does not approve the offering or vouch for the investment. When the registration statement is declared effective, the final prospectus with the offering price is delivered and sales begin.

IPOs give a company access to permanent capital and give early shareholders a path to liquidity, but they also bring ongoing reporting obligations and public scrutiny. Investors face the risk that a newly public company has a short public track record and that the shares can be volatile once free trading begins.

The SIE, Series 6, Series 7, Series 65, and Series 66 exams all test the IPO process. Common question targets include what may and may not happen during the cooling-off period, the difference between the preliminary and final prospectus, the fact that SEC clearance is not approval, and FINRA rules restricting sales of new issues to industry insiders.