What Is an IPO (Initial Public Offering)? How It Works and Examples

Under US securities law, a company may not offer or sell shares to the public unless the offer is registered with the SEC or an exemption applies. An S-1 IPO is the standard route. The company files a registration statement on Form S-1. Most of it is the prospectus, the document investors read before they buy. Foreign private issuers, the SEC’s term for most non-US companies, usually file the equivalent, Form F-1. The steps run in this order.

1. 1.0
   PreparationThe company hires its banks, has its financial statements audited and builds the controls a public company needs. An emerging growth company, one with revenue below $1.235B, may show two years of audited financials instead of three.
2. 2.0
   Confidential draftMany companies first submit a draft registration statement for private review by the SEC. That way, changes are made before anything is public.
3. 3.0
   SEC reviewThe SEC staff checks the disclosure against the rules and sends comment letters. The company revises the prospectus until the comments are resolved. The SEC does not judge whether the IPO is a good investment.
4. 4.0
   Public S-1The registration statement and the earlier drafts are filed publicly on EDGAR, the SEC’s filing database, at least 15 days before the road show. A later amendment, the S-1/A, adds a price range.
5. 5.0
   Road show and book-buildingOn the road show, management and the underwriters pitch the shares to investors. The underwriters collect indications of interest: how many shares each investor would buy, and at what price. Together they form the order book.
6. 6.0
   Pricing and effectivenessThe SEC declares the registration statement effective. The company sets the offer price on the underwriters’ advice, and the shares are allocated to investors. A final prospectus with the price is filed as a 424B4.
7. 7.0
   First tradeThe exchange runs an opening auction, and the shares begin trading. In the first days, the underwriters may buy shares to keep the price from falling far below the offer. Once that support ends, the price can drop.

On the Marketing of IPOs: What a Company May Say, and to Whom

Before the filing, what a company says in public is limited. A message that warms up the market can count as an offer. Since 2019, Rule 163B has let any company “test the waters” to judge demand. It can talk to large professional investors, known as qualified institutional buyers and institutional accredited investors, before or after filing. Marketing to individual investors comes later, through the prospectus and the road show.

What Is an IPO Listing, and How Does It Differ from the Offering?

The offering and the listing are two different things that happen together. The offering is the sale of shares. The listing is the exchange admitting them to trade. A company can list without an offering. That is called a direct listing, and it is compared in direct listing vs IPO. The prospectus names the exchange the company has applied to.

Why do companies do IPOs? Usually for three reasons at once. Capital: new shares sold in the offering raise money for the business. Liquidity: founders, employees and early investors get a market where they can eventually sell their shares. Currency: listed shares can pay for acquisitions and staff, at a price everyone can see. Why IPOs are important to the wider market is the same point seen from the other side. They move a company’s ownership, and the information about it, into public view.

Not every share in an IPO is new. Existing holders can sell in the offering as selling shareholders if their shares are registered. The money from those shares goes to them, and the company receives none of it. The prospectus cover states how many shares each side is selling.

The cost has two parts. The visible one is the underwriting discount, also called the gross spread: the share of the money raised that the banks keep. On mid-sized US IPOs, it barely varies. Of the IPOs that raised $30–160M between 2001 and 2025, 93.3% paid exactly 7%. The less visible cost is underpricing, selling the shares for less than the market will pay. The SEC’s own guidance notes that a lower price helps the underwriters sell every share and pleases their investor clients, at the company’s expense. In 2025, the average first-day return on US operating-company IPOs was 29.3%. That came to $13.11B that companies and selling holders did not receive.

The IPO in the stock market is also counted more narrowly than headlines suggest. Jay Ritter of the University of Florida counts 90 operating-company IPOs in the US in 2025. Other trackers report 176 or more. They include SPACs (shell companies that list first and buy a business later), funds and penny-stock listings. Both figures are correct. They count different things.

How IPO shares work is easiest to see with numbers. The company below is invented, but the arithmetic is the same in every offering sold through underwriters.

A real one: SpaceX priced its IPO on June 11, 2026, at a $1.77T valuation. It began trading on Nasdaq as SPCX the next day. Six months earlier, an insider share sale had valued it at $800B. The full private-to-public sequence is set out in pre-IPO vs IPO. That page also explains why the gap between the two valuations does not equal the return on one share.

Four things change. None of them puts cash in your hands on the first day.

• Share classPreferred stock usually converts into the listed common stock when the IPO closes. Preferred shares often carry a liquidation preference, the right to be paid first if the company is sold. That protection falls away.
• Lock-upExisting holders typically agree with the underwriters not to sell for a period. The SEC says that period is typically 180 days. Terms, early releases and what happens when it ends are on the IPO lock-up page.
• Holding periodRestricted shares, those acquired privately and never registered, also carry a Rule 144 holding period. Rule 144 is the SEC rule for reselling such shares. The period runs from when you acquired the shares: six months once the company has been reporting for at least 90 days, one year before that.
• InformationThe company now files quarterly and annual reports, on Forms 10-Q and 10-K, and its insiders’ trades become public. Insiders who want to sell on a schedule often use a Rule 10b5-1 plan, a trading plan set up in advance.

If you hold through a pooled vehicle, such as a fund or an SPV (a special purpose vehicle that pools investors’ money), the vehicle is the shareholder. It is locked up like everyone else. It then sells or distributes the shares as its documents set out. How that works at AXEVIL is explained in how exits work.

A pre-IPO marketplace is any place where shares of a still-private company change hands before the listing. It includes broker-run platforms that match buyers with employees and early investors. It also includes company-run tender offers and pooled vehicles that buy a block of shares and divide it. Every trade there is a secondary transaction, a sale from an existing holder to a new one, and it needs the company’s consent. Most are open only to accredited investors, who meet US income or wealth tests. The kind of company traded there is described in what a pre-IPO company is.

The chances of getting an IPO allocation at the offer price are small for most individuals. The SEC explains why. Underwriters often give most of the shares to their institutional and high-net-worth clients, such as mutual funds, hedge funds, pension funds and insurers. Most individuals buy in the aftermarket, the trading that starts once the shares list, at whatever the first trades cost. In a popular offering, the first-day gain has already gone by then.

Common Mistakes

• Treating the listing as paydayFor an existing holder, it usually starts a lock-up. Cash comes after the lock-up ends, at that day’s price.
• Reading SEC effectiveness as approvalThe SEC checks only that the disclosure follows the rules. A registered offering can still be a poor investment.
• Assuming the offer price is availableMost individuals buy after trading opens, at the market price.
• Comparing the IPO valuation with the last round as a returnThe offering issues new shares. A higher company valuation does not mean each share rose by the same amount.
• Counting a confidential filing as a dateDraft filings get delayed and withdrawn. Until the public S-1 and a road show, there is no timetable.

Registration statement

The filing, usually Form S-1, that registers the offer with the SEC. Most of it is the prospectus.

Underwriter

An investment bank that buys the shares from the company at a discount and resells them to investors at the offer price.

Gross spread

The underwriters’ fee: the gap between what they pay the company and the offer price.

Road show

Meetings in which management and the underwriters pitch the shares to investors before pricing.

Indications of interest

Non-binding orders collected on the road show: how many shares an investor would buy, and at what price. Together they form the order book.

Offer price

The price at which shares are sold in the IPO, decided by the company on the underwriters’ advice.

Selling shareholders

Existing holders whose shares are registered and sold in the offering. The money goes to them, and the company receives none of it.

Underpricing

The gap between the offer price and the first-day close. The buyers at the offer gain it, and the sellers give it up.

Lock-up

A contract in which existing holders agree with the underwriters not to sell for a period after the IPO.

Pre-IPO company

A late-stage private company expected to list within a few years. The term is a market label with no legal definition.

Figures were last checked on October 2, 2026. Rules are cited for the United States. Exchange listing standards and other countries add their own. For the investor’s view of the same company before and after its listing, see pre-IPO vs IPO. For the underlying SEC text, the Investor Bulletin is short and worth reading in full.