How IPOs Work

Having an IPO is not so much an event as it is a process. It takes months of planning to prepare a company to go public. A board of directors must be assembled, accounts audited for accuracy, consultants and advisers hired, and a financial printer contracted. In fact, a whole cast of characters must take the stage to help an IPO happen.

The most important character is probably the underwriter, an investment banker who works for an investment company. Underwriters have the distribution channels and business community contacts that can get a company's shares out to the right investors. They will also help set the initial offering price for the stocks, work to create enthusiasm for the stock, and assist in creating the prospectus. The prospectus is an important document that describes the company in great detail to potential investors.

Once the prospectus has been drafted, it is reviewed by the SEC. SEC approval only means that the prospectus follows the regulations for such documents – it says nothing about the quality or future profitability of the company [source: Sheffield and Wilks].

Following SEC approval, company executives go on the road show. This is a tour of major cities and cities where important brokerage houses have their headquarters. At these invitation-only slide shows, a few elite investors will even get one-on-one presentations [source: Sheffield and Wilks]. However, no one involved with the company is allowed to talk publicly about anything that isn't in the prospectus in the period leading up to the IPO.