The History of Initial Public Offerings
The first IPO occurred much earlier than you likely thought, arriving well before the creation of the first stock exchange in 1779.
In 1602, the Dutch East India Company formed to protect the Dutch government’s trade routes and build a trade monopoly in the Indian Ocean. To fund their voyages, they sold shares of the company to investors. In return for their capital, investors received dividends yielding between 12 and 63 percent. This was the blueprint for the first modern IPO.
The first American IPO occurred in 1781 with the public offering of America’s first central bank, the Bank of North America. That bank, along with The First Bank of the United States and the Bank of New York, were the first stocks to be listed and traded on the New York Stock Exchange.
IPOs only showed their lasting power from there on out. In 1906, Sears Roebuck & Co. went public with help from then-fledgling Goldman Sachs. The Sears IPO put the consumer and retail industries on the map as serious market influencers.
When Ford went public in 1956, it was the largest IPO in history. The company offered 10.2 million shares priced at $64.50 each. Founder Henry Ford never wanted his company to go public because he viewed it as a debt to the investors. He was quoted as saying the company would only go public “over [his] dead body.” Shares of Ford were listed on a stock exchange nine years after Henry Ford died.
Ford’s IPO held the top spot until 1980, when Apple went public on the NASDAQ.
IPOs on the rise in the 1990s
Going public used to be the most popular way for growing businesses to raise money, especially during the dot-com era of the 90s. Internet companies like AOL, Yahoo!, and Excite were dominating headlines, and some were able to raise big money from their IPOs. For context: after its IPO, Yahoo had a market cap of more than $1 billion.
It was Netscape’s IPO in August 1995 that kickstarted the public offering boom of the late 90s. Netscape went public at $28.00 per share, and closed its first day at $54.00. Many believe that this event sparked everyone’s investing interest in the internet, as the market shifted to e-commerce IPOs and other tech companies who were delivering huge value to this new “internet” thing.
IPOs are relatively commonplace these days, but they still generate big media attention. Companies like Facebook, Twitter, and Snapchat made headlines when they went public, and there’s even talk of big names like Uber, Lyft, and Pinterest going public in the coming year.
History tells us one thing for certain: IPOs are alluring to companies not just because of new access to capital, but because publicly traded companies get to offer stock packages to employees and gain credibility by complying with complex exchange commission regulations.
If you think about the brands and companies that dominate your life, it’s likely that many of them are traded on a stock exchange.
How does your standard IPO start?
There are a number of players who have their hands in the initial stages of launching an IPO. The first step is for the company to choose an investment bank with whom they will do business. Investment bankers are in charge of handling the amount of money to be raised, issuing the specific type of securities, and selecting a group of intended buyers.
After the investment bank is determined, a initial team of underwriters (members of the investment banking firm) work together to get an IPO on its feet by compiling a preliminary prospectus (also called a “red herring prospectus” because of the distinctive red ink markings). This document contains information about the company along with its board members, structure, long term goals, and financial statements.
This document will be presented to the regulatory agency (within the US, it’s the Securities Exchange Commission, or SEC) and will go through a number of drafts. Once the document is finalized, the securities regulatory agency reviews the prospectus and creates the final prospectus, complete with stock pricing and total number of shares. This document will be shared with investors if the company chooses to do a “road show,” where they pitch their shares to influential investors and fund managers.
The final step for an IPO within the US is to file Form S-1, which will detail everything from board members to how the money raised will be used. Then a date is set for the IPO, during which the company will ring the opening bell.
If you’ve heard the terms “float” and “going public,” these correlate to when company a company is publicly trading on a stock exchange. The company’s stock, ticker, and price will appear on the stock exchange on the day they become a publicly traded company.
In the next chapter, we’ll explore more about who exactly benefits from IPOs, and how.