In our 'What is a Stock' report, we met Dave and the Pear company. When Dave needed money to help his company grow Dave took Pear public. An Initial Public Offering or IPO is when a private company becomes a public company. Once a company is public, the public can buy shares of the company. Looking at Pear again we are going to explore Pear's IPO.

1

Dave and the other owners who make up Pear's management team decide to take the company public. By taking the company public, Pear will raise enough money to develop, market, and sell their new technology.

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2

Dave and the other owners search for an underwriter to assist them in going public. The underwriters will verify Pear's income and financials. The underwriter will be the company buying and selling the shares in the market.

(A few underwriters that you may have heard of are Goldman Sachs, Credit Suisse, J.P. Morgan, and Morgan Stanley)

3

Pear chooses an underwriter and registers with the Securities and Exchange Commission (SEC). This registration becomes the preliminary prospectus. The prospectus will contain the company's financial history along with the company's future plans. The SEC will review the prospectus, and have Pear update or amend anything in the prospectus that needs to be updated or amended.

3a

The prospectus is what investors who are interested in Pear's stock use to review the company's financials and plans for the money they will receive from the IPO.

Pear

Road Show

TECHNOLOGY

Pear

Road Show

4

The Road Show. This is when Pear and its underwriters go on the road to promote Pear to potential investors. Remember from the 'What is a stock' page, Pear is known for making smartphone apps, but they have a new product that they would like to sell. On the road show, Pear will try to familiarize investors with Pear's business and products.

5

The Offering Price and Amount. This is the stage when Pear and its underwriter determine how many shares of Pear they will bring public to the market and the initial price of those shares. The price and amount are determined by demand and market conditions. If market conditions are strong and technology stocks are in favor, Pear's stock will be priced higher than if market conditions were sluggish and there was little to no demand for tech companies. 

In this case Pear's offering is 50 million shares at $25 per share. The 50 million shares represents 40% of Pear as a company.

50 Million

6

The Final Prospectus is complete. Once Pear and its underwriter have the final prospectus, they can distribute the prospectus or red herring to potential investors.

7

Pear's stock is trading. A few days after potential investors receive their final prospectus, the stock will begin trading on stock exchange for the first time ever. This will allow investors to purchase stock in Pear.

These are the basic steps of taking a company public. There won't be many IPO's in a Seville Report because we find them to be more speculative than stocks that have a public track record. However we hope this was helpful in understanding what an IPO is.