IPO Definition

What Is an IPO?

An Initial Public Offering (IPO) is the process by which a company offers its shares to the public for the first time and lists on a stock exchange. The primary goal is to raise capital and enable the company’s shares to be freely traded on the secondary market. An IPO transitions a “private company” into a “publicly listed company” and requires compliance with regulatory standards and public disclosure of information.

During an IPO, the company discloses its business model, financials, and associated risks, enabling investors to make informed subscription decisions. The stock exchange oversees listing and ongoing regulation, ensuring that once trading begins, shares can be freely bought and sold among investors.

Why Are IPOs Important?

IPOs are significant as they provide companies with a large-scale, relatively low-cost equity financing channel and give investors an opportunity to participate in a company’s growth. Going public also enhances corporate transparency and governance standards.

For companies, an IPO raises brand recognition and creditworthiness, helping attract customers and talent. For markets, IPOs increase the diversity of investable assets and improve resource allocation efficiency. In recent years, global IPO activity has fluctuated in response to interest rate changes and market sentiment, leading companies to become more strategic about timing their listings.

What Are the Key Steps in the IPO Process?

The IPO process typically consists of preparation, filing, pricing & allocation, and listing. These stages are driven by coordinated efforts among the company, underwriters, and regulators.

Step 1: Internal Preparation. The company strengthens governance, completes financial and internal control requirements, selects underwriters and intermediaries, and drafts a prospectus (a detailed disclosure document for investors).

Step 2: Filing and Approval. Submission of materials to regulators and exchanges, responding to inquiries, refining disclosures, and obtaining issuance approval.

Step 3: Marketing. Roadshows are conducted to introduce the business and financials to investors and gauge interest for pricing purposes.

Step 4: Pricing & Allocation. The offering price is set based on investor interest (price and quantity), and shares are allocated to different investors.

Step 5: Listing & Trading. After settlement, the company is listed on the exchange, trading commences in the secondary market, and continuous disclosure obligations begin.

For example, a cloud software company planning an IPO on the STAR Market would enhance disclosures on R&D investment and customer concentration during preparation, address business model and risk queries during the review phase, and discuss growth and profitability with institutional investors during roadshows.

How Are IPO Shares Priced and Allocated?

IPO pricing commonly uses a “book building” process: underwriters ask institutional investors for acceptable prices and quantities to create a demand curve and determine the final offering price. Other methods include fixed pricing or price range bidding.

In allocations, institutional investors usually receive larger portions of shares, while some markets reserve quotas for retail investors. If demand is strong, oversubscription may occur; if weak, underwriters may help stabilize the issue.

Pricing considers comparable company valuations, growth expectations, market interest rates, and risk appetite. Overpricing may lead to “breaking issue” (share price falling below offering price) after listing; underpricing may result in insufficient fundraising or increased volatility.

What Are Underwriters, Regulators, and Sponsors in an IPO?

Underwriters—typically investment banks or brokerage firms—assist companies with designing, pricing, and selling the offering; they serve as professional advisors for stock sales. Regulators and exchanges oversee compliance reviews and disclosure standards to ensure market fairness and investor protection.

Sponsors (in some markets this role is performed by underwriters) provide ongoing supervision to ensure regulatory compliance before and after listing. Accountants and lawyers serve as key intermediaries, offering audit and legal compliance services respectively, creating a system of checks and balances.

How Can Investors Participate in IPO Subscriptions?

Investors can participate in IPO subscriptions by holding eligible brokerage accounts as required by specific markets.

Step 1: Account Setup & Eligibility. Open an account, complete risk assessments, sign agreements, and understand subscription conditions including minimum capital or asset requirements.

Step 2: Review Prospectus. Assess the business model, financial health, shareholding structure, and risk factors—avoid investing based solely on hype.

Step 3: Submit Subscription. Place orders through broker platforms during designated windows; note any requirements for fund or asset freezes as well as allocation rules.

Step 4: Payment & Holding. If allotted shares (“winning the lottery”), make payment on time; monitor listing arrangements including price limits or lock-up rules. If not allotted, funds are unfrozen.

Risk Warning: New IPO shares do not guarantee price increases. If fundamentals or pricing are mismatched, there may be significant volatility or losses on or after listing day.

What Are Common IPO Mechanisms?

Key mechanisms include lock-up periods, green shoe options, and cornerstone investors—each serving different roles in stabilizing or constraining share sales.

Lock-up periods restrict certain shareholders from selling their shares for a set time post-IPO to avoid excessive volatility from mass early selling.

The green shoe option (overallotment option) allows underwriters to allocate additional shares or buy back shares on the market within a short period after listing to stabilize prices.

Cornerstone investors commit to purchasing substantial share blocks before listing—signaling confidence—but typically face holding period or transfer restrictions.

Additionally, markets may set allocation ratios between retail and institutional investors, clawback mechanisms, or subscription thresholds—investors must familiarize themselves with local rules.

How Does an IPO Differ From an IEO, ICO, or STO?

An IPO issues company equity under strict securities regulations with high disclosure standards. IEOs/ICOs/STOs involve crypto assets or tokens with different legal natures, rights structures, and compliance frameworks.

An IEO (Initial Exchange Offering) is a token sale managed by an exchange—which oversees review and sales processes; for example, Gate’s Startup/IEO platform allows token subscriptions before listing, with distribution governed by on-chain protocols and platform-specific rules. Subscription thresholds, vesting, and allocation logic differ from IPOs.

An ICO (Initial Coin Offering) is a public token sale method historically marked by regulatory inconsistencies and higher risks. An STO (Security Token Offering) aims for asset-backed compliance but still differs from traditional equity in its legal treatment.

For investors, IPOs vs. IEOs/ICOs/STOs have fundamental differences in asset rights, regulatory protection, disclosure requirements, and valuation methods—always review rules and risks before participating.

Key Takeaways About IPOs

An IPO is when a company raises public capital for the first time through exchange listing—requiring regulatory approval, underwriter-led pricing, and robust disclosure. Book building is the common pricing method; lock-up periods and green shoe options help stabilize early trading. Investors should open eligible accounts, carefully read prospectuses, subscribe rationally, and be alert to first-day or lock-up expiration volatility. Compared with IEOs/ICOs/STOs, IPOs differ significantly in asset class, regulatory rigor, and investor rights—make decisions based on personal risk tolerance and market conditions.

FAQ

After an IPO lists, when can I sell my shares?

Once an IPO is listed, you can freely trade your shares on the secondary market—except for lock-up restrictions. Typically, company executives and major shareholders face a 6-month lock-up period during which they cannot sell shares; retail investors can usually trade allotted shares from day one. After the lock-up expires, relevant shareholders may gradually reduce holdings but must comply with disclosure rules.

Why do some companies choose IPOs while others stay private?

An IPO allows companies to access more funding, enhance brand value, and incentivize employees—but comes with increased disclosure obligations, regulatory compliance costs, and operational pressures. Private companies retain more autonomy and confidentiality. The choice depends on company size, funding needs, industry characteristics, and founder preferences—startups often raise venture capital first before considering an IPO once mature.

What does it mean if an IPO is “underwater”? What should investors watch out for?

“Underwater” refers to when a newly listed stock trades below its offering price on day one or afterward. This often signals concerns about company prospects or poor overall market conditions. Investors should research fundamentals instead of chasing hype; avoid buying at inflated prices; consider industry cycles and macro trends. An underwater IPO doesn’t necessarily mean the company lacks potential—distinguish between short-term volatility and long-term value.

How can retail investors participate in IPO subscriptions? What are the requirements?

Most countries allow retail investors to apply for IPO shares online via brokerage accounts. In the US, you can participate by opening a brokerage account; in China you typically need an average daily shareholding value over the past 20 trading days. Before applying, review the prospectus, pricing range, and listing date; submit applications through broker systems during specified times based on allocation rules.

What is the "green shoe" mechanism in an IPO? How does it impact share price?

The green shoe mechanism gives underwriters an overallotment option—allowing them to purchase up to 15% additional new shares at the offering price within 30 days of the IPO to stabilize prices or meet excess demand. This tool helps protect investors from excessive volatility by giving underwriters flexible price support options. Using the green shoe typically signals strong market demand; not using it may indicate weaker demand.