What is IPO? 06 things to know about IPO investment in Crypto
What is IPO? What are the benefits and limitations of an initial public offering (IPO)? Should IPO Investments in Crypto?
If you have always wondered what an IPO is, what is the difference between IPO and ICO, why in the Crypto market there are very few IPO projects,… then this article is for you.
In the article, we will learn about 6 things to know about IPOs, including:
- What is IPO?
- Main difference between IPO, ICO, IEO?
- The pros & cons of the IPO model.
- IPO process.
- IPO projects in Crypto.
- Should IPO investment in Crypto market?
What is IPO?
IPO (Initial Public Offering) is an initial public offering of shares. This is the process by which a private company first publicly sells shares to the public to raise capital.
In essence, in an IPO, a private company will list its shares on a stock exchange, making them available to the public to buy.
Startups or companies that have been in business for a long time may decide to list shares through an IPO.
Companies often issue IPOs to raise capital to pay off debts, fund business development initiatives, and more.
What is IPO?
Key Difference Between IPO, ICO, IEO in Crypto
In crypto, the ICO, IEO models are all variations of the IPO model in the traditional financial market.
Although the ICO, IEO, IPO models have many similarities, there are still major differences between them in terms of management measures, security, marketing strategies, and difficulty of setup.
Every private company that wants to raise capital by issuing new shares to public investors must go through the initial public offering (IPO) process. By this way:
- Private investors have the opportunity to realize income from their investments.
- The public has the opportunity to invest their funds in a proven business model.
Private companies have to go through many different processes and regulations and are governed by law.
What is an IPO – IPO is multi-process, regulated and governed by law
ICO (Initial Coin Offering) is the initial coin offering, it is the most popular community token sale model in crypto, especially during the peak of the bull market in late 2017 and early 2018.
The main reason for the boom of ICOs is that they ignore the transparency requirements of the IPO crowdfunding model. Therefore, projects & companies can easily use them to attract investors.
Other ICOs IPOs: Bypassing Transparency Requirements
The barriers to ICO activities are very low, all that is needed is to set up a website, a bit of information about the project and the fundraising form. The ICO model lacks oversight, anonymity and protection for investors.
On the other hand, the liberal nature of the ICO process is in keeping with the general spirit of cryptocurrencies, which require people to be more responsible with their money when investing.
Instead of projects doing all the work themselves like ICOs, they can rely on cryptocurrency exchanges to raise funds.
An exchange’s reputation will be significantly damaged when supporting an IEO (Initial Exchange Offering) a scam project, so it’s in the exchange’s best interest that they conduct a thorough due diligence prior to hosting IEOs.
Therefore, IEOs are often more trustworthy than ICO-funded projects. For the project itself, the benefit of the IEO model is clarity, as they can access the exchange’s existing user base and marketing resources.
IEO vs IPO: More Trust, Clarity & Transparency
What businesses gain and lose from IPO?
An initial public offering (IPO) seems to be a realistic goal for many startups.
While an IPO is a worthy goal with many potential benefits, there are also many risks and disadvantages associated with listing shares to the public.
Benefits: Why an IPO?
1. Fundraising ability
The first advantage of an initial public offering is money.
The proceeds of an IPO provide many reasons for many companies to go public, even without taking into account other benefits, especially when considering the many investment opportunities available. due to new capital.
These funds can benefit a growing company in countless ways.
Companies can use an initial public offering to fund research and development, hire new employees, build infrastructure, reduce debt, acquire new technology or other companies. other company,…
2. Opportunity to exit capital
Every company has stakeholders who have contributed a significant amount of time, money and resources in the hope of creating a successful company.
These founders and investors often go years without any significant financial return from their contributions.
The initial public offering of shares is a “profit-making” opportunity for stakeholders whereby they can receive large sums of money, or at the very least, lock in the little capital they currently have in the company.
What are the benefits of an IPO? Opportunity to exit capital
3. Publicity and Reliability
If a company hopes to continue to grow, it will need to increase its exposure to potential customers who already know and trust its products.
IPOs can help companies go public. Analysts around the world report on every IPO to help their clients decide whether to invest.
IPO helps businesses get more popular and interested
Companies not only receive great attention when deciding to list shares, but also gain credibility.
In order to complete an offering, a company must go through a rigorous process of monitoring to make sure what it is reporting about itself is accurate.
This scrutiny, combined with the tendency of many individuals to trust public companies, can lead to increased credibility for a company and its products.
Limitations: Trade-offs when doing IPO
1. Many additional regulations
Unlike private companies, public companies are required to file their annual financial statements with the Securities and Exchange Commission (SEC).
These financial statements must be prepared in accordance with accepted accounting principles in the United States and audited by a certified public accounting firm.
These SEC regulations are both burdensome and expensive. Publicly reporting a company’s financial position requires it to:
- Establish tighter financial controls.
- Hire financial reporting staff and audit committees, and conduct quarterly and annual financial audit processes.
- Hire an audit firm and complete many other related tasks.
These jobs cost public companies millions of dollars a year and require thousands of hours of labor.
IPO organization requires many additional regulations
2. The possibility of losing control
One major disadvantage of IPOs is that founders can lose control of their company.
While there are ways to ensure the founders retain the majority of decision-making power in the company, once the company goes public, management needs to keep the public happy, even if the shareholders do not. Other shareholders do not have voting rights.
Going public means receiving a substantial amount of money from public shareholders.
Since shareholders have provided the company with so much money, they expect the company to act in their best interests, even if that means going in a direction the founders don’t like.
If shareholders feel the company is not operating in a way that makes them money, they will force the company, through shareholder vote or public criticism, to appoint new management.
3. Transaction costs
IPOs are very expensive. In addition to the recurring costs of a public company’s regulatory compliance, an IPO transaction comes at an expensive cost.
The biggest cost of a public offering is the cost of underwriting, which will typically charge between 5% and 7% of the total proceeds.
In addition to the underwriting fee, companies will have to spend about $1.5M – 2M for legal fees, $1M for audit fees and $500K for registration and printing fees.
Transaction costs will be even higher if a company chooses to hire financial reporting advisors, or other specialized groups.
How does the IPO process work?
In order to hold an IPO, companies need to go through the IPO process that includes 5 steps as follows:
How does the IPO process work?
The first step in the IPO process is for the issuer to select an investment bank to advise on the IPO and provide underwriting services.
Usually companies will choose a bank that meets the following criteria:
- High research capacity and quality.
- Experience and expertise in the industry.
- Distributability, i.e. can the bank sell issued securities to multiple institutional investors or to multiple individual investors?
- Previous relationship with investment banking.
The underwriter will then have to prepare and draft the documents required by the SEC such as: Letter of Commitment, Letter of Intent, Underwriting Agreement, Declaration of Registration & Red Herring Document.
Underwriting is the process by which an investment banker (also known as an underwriter) acts as a broker between the issuer and the investing public to help the issuer sell its initial shares of stock his head.
After submitting the above documents, the company just needs to wait for approval to announce and organize the IPO. Companies will announce and present their IPOs with Roadshows that run through the areas where the shares are offered.
The success or failure of these Roadshows plays an important role in determining the IPO offering price.
Featured projects that have been and are about to IPO in Crypto
Here are some of the upcoming and upcoming IPOs in the crypto space.
Coinbase is a cryptocurrency exchange based in the United States. Coinbase went public in April 2021. At the time of listing, the company was valued at up to $100B.
Coinbase’s share price started at $381 per share, rose to $430 and then fell back down to $320 before stabilizing around the $230 region.
Learn: What is Coinbase S1? Things you should know about Coinbase IPO
Coinbase IPO in April 2021
Kraken plans to go public in 2022, a decision made following the successful launch of Coinbase.
Additionally, Kraken CEO Jesse Powell remains uncertain about how the exchange will list. The volatility of Coinbase’s stock price has left Powell uncertain about the company’s future.
Kraken will continue to monitor the cryptocurrency industry and will make decisions based on its performance.
Kraken is expected to hold an IPO in 2022
BlockFi is a crypto-focused lending platform. BlockFi has revealed its intention to hold an IPO within the next year or so. Through 4 Series rounds, BlockFi has raised more than $400M.
BlockFi has revealed its intention to hold an IPO within the next year
Should IPO investment in Crypto market?
As you all know, after Coinbase’s explosive IPO on the stock market, Coinbase’s stock entered a slightly bearish and sideways trajectory. It is currently trading at $230/share and once hit as low as $190/share.
In addition, the shares of listed companies are often priced quite high, plus the legal corridor for the Crypto market is still not too clear, so the investment in shares of these projects is not very clear. Projects that have been and are about to IPO in the Crypto market at the moment are quite risky.
Read more: Is the Crypto Market a Miniature Economy?
Thus, we have learned what an IPO is, the pros & cons of the IPO model. If you have other questions related to the above topic, please comment below for Coin98 to support right away!
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