Section: 3 Initial Public Offerings (IPOs)
When a corporation needs to raise capital, they either issue debt securities (bonds) or by equity (selling stock). Anytime a corporation issues new stock it comes from 'Authorized But Not Yet Issued Stock'. If the corporation has sold stock before, this is known as a ‘Seasoned Offering'. A company can have many Seasoned Offerings. When a corporation offers its stock for sale for the first time, it is known as an Initial Public Offering (IPO). A company can only have one Initial Public Offering. The first step for the corporation is to hire an investment bank. The investment bank will act as the advisor, distributor and underwriter. Underwriting is the actual process of raising capital through debt or equity. The corporation seeking to raise capital is not required to hire the services of an investment banker by law and if it wanted to, it could go door to door selling its stocks or bonds.
Investment bankers advise the firm regarding the terms on which it should offer the securities. A preliminary registration statement must be filed with the Securities & Exchange Commission (or whoever is the relevant regulatory authority), describing the issue and the prospects of the company. This statement in the final form, and approved by the regulatory authority, is called the Prospectus.