How IPOs work: from S-1 filing to first trade and lock-up

An initial public offering (IPO) is the first time a company sells its shares to the general public. Before an IPO, a company's stock is held privately by founders, employees and investors such as venture capital funds. After it, the shares trade on an exchange like the New York Stock Exchange or Nasdaq, and anyone with a brokerage account can buy them.

Going public is one of the most important events in a company's life, and IPOs attract lots of attention: big first-day jumps make headlines, and investors wonder how to get in early. This guide walks through the US IPO process step by step, explains who actually gets shares at the offering price, what lock-ups are and why they matter, how direct listings and SPACs differ from a traditional IPO, and the specific risks of buying newly public stocks.

Why companies go public

A company goes public for some mix of these reasons:

• Raise capital to fund growth, pay down debt or make acquisitions.
• Give early investors and employees liquidity, a way to sell shares they've held.
• Create a currency of publicly traded stock for acquisitions and employee pay.
• Raise its profile with customers, partners and future hires.

There are costs too. Underwriting fees, legal and accounting bills, and the ongoing expense of being public are substantial. Public companies must file quarterly and annual reports with the SEC, such as Forms 10-Q and 10-K, face scrutiny every quarter, and give up some privacy and control.

The IPO process, step by step

1. Choose the underwriters. The company hires one or more investment banks, led by a "bookrunner," along with lawyers and auditors. In the most common arrangement, a firm commitment, the underwriters agree to buy the shares from the company at a discount and resell them to investors.

2. Prepare and file the registration statement. Under the federal securities laws, a company may not offer or sell securities unless the offering is registered with the SEC or an exemption applies. For an IPO this usually means Form S-1. Most of it is the prospectus: the business description, risk factors, audited financial statements, management's discussion of results, executive pay, ownership, how the money will be used, and the offering terms. Amendments are filed as S-1/A. Smaller "emerging growth companies" may submit drafts confidentially at first.

3. SEC review. SEC staff review the filing and send comment letters asking for changes or clarifications. The company revises and refiles, sometimes several times. Investor.gov stresses that this review is about disclosure: the staff "does not evaluate the merits of any IPO." When comments are resolved, the SEC declares the registration statement effective, which allows the sale to proceed. Comment letters are made public on EDGAR later.

4. Roadshow and book-building. The company and its bankers set a price range in an amended filing and present to institutional investors, in person or online. Investors give indications of interest: how many shares they'd want at what price. The bankers build a "book" of demand.

5. Pricing and allocation. Usually the evening before trading begins, the underwriters recommend a price based on demand and the company decides the final offering price. Strong demand can push the price above the range or increase the number of shares; weak demand can push it below or postpone the deal. The underwriters then allocate shares. Most typically go to their institutional and high-net-worth clients. The final prospectus is filed, often as a 424B4.

6. First day of trading. The stock opens on the exchange. The opening price is set by buy and sell orders in an opening auction and can be far from the offering price. Many IPOs are priced a little below what the market will pay, which produces a first-day "pop" for those who received shares at the offering price.

7. Stabilization and the over-allotment option. Underwriters often sell up to 15% more shares than planned and hold an option (the "greenshoe") to buy those extra shares from the company. This lets them support the price in the early days by buying back shares if it falls below the offering price.

8. Lock-up and quiet period end. Insiders' lock-ups expire, commonly after about 180 days, and analysts at the underwriting banks can begin publishing research after a set waiting period.

Lock-up agreements

Founders, employees and early investors usually agree not to sell their shares for a period after the IPO. The SEC notes that most lock-ups last 180 days, although terms vary, and that the company must disclose the lock-up terms in its registration documents. Lock-ups are contractual agreements with the underwriters, not an SEC rule.

Lock-ups exist to stop a flood of insider selling while the stock is new. Because the locked-up shares often outnumber the shares sold in the IPO, the expiry date matters. Investor.gov warns that when lock-ups expire, the price may fall significantly if many shares become available at once. Some companies now use staged releases tied to dates or price targets.

Alternatives to a traditional IPO

Direct listing

In a direct listing, a company lists its existing shares on an exchange without an underwritten offering. There is no roadshow price set by bankers; the first price comes from the exchange's opening auction. Existing shareholders can sell from day one, and there is typically no lock-up. Companies save on underwriting fees but give up the banks' price support and guaranteed placement. In December 2020 the SEC approved NYSE rules allowing a company to sell new shares to raise capital as part of a primary direct listing, and Nasdaq adopted similar rules.

SPAC merger

A special purpose acquisition company (SPAC) is a shell company that holds an IPO of its own, puts the cash in a trust, and then looks for a private company to merge with. When the merger (the "de-SPAC") closes, the private company becomes public. Investor.gov's 2024 bulletin urges investors to look closely at the SPAC sponsors' financial interests, which can differ from those of public shareholders, and at dilution from sponsor shares and warrants. The SEC adopted new SPAC disclosure rules on January 24, 2024, effective July 1, 2024, covering sponsor compensation, conflicts of interest, dilution and the use of projections.

Risks of buying IPO stocks

Limited track record. A new public company has no history of public filings. Most of what you can know is in the prospectus. Read the risk factors and the use of proceeds.

Hype and allocation. The shares easiest for individual investors to get at the offering price are often in the deals institutions want least. Buying after the open means paying whatever the market sets, which in a hot IPO can be well above the offering price.

Early volatility. With a small public float and no trading history, prices can swing widely in the first weeks.

Lock-up expiries. A large wave of insider shares becomes saleable on a known date.

Dual-class structures. Many recent IPOs give founders shares with extra votes, so public investors have little say in governance. The prospectus discloses this.

Valuation. Companies tend to go public when markets are buoyant and their own results look good, which is good timing for sellers and not necessarily for buyers.

How to research an IPO

1. Find the filings. Search the company on the SEC's EDGAR system for its S-1, S-1/A amendments and final 424B prospectus.
2. Read the summary, risk factors and use of proceeds. What will the money be used for, and who is selling?
3. Study the financials. Revenue growth, margins, cash burn and how long the cash lasts.
4. Check ownership and control. Who owns what after the offering, voting classes, and lock-up terms.
5. Compare valuation with listed peers. At the offering price, what is the market cap relative to revenue or earnings?

The What is a stock? A complete beginner’s guide to shares guide covers what you own as a shareholder, and the Risk and return: volatility, drawdowns and the equity premium guide explains why new, unproven businesses tend to be more volatile.

How Finabase helps

Finabase is a research app; it doesn't take part in IPOs or allocate shares. Once a newly listed company starts trading, its symbol page carries its quote, chart, profile and financials as data becomes available. The news feed and trending list show which new listings are drawing attention, and the earnings calendar shows when a new public company reports its first quarterly results.

Frequently asked questions

Can individual investors buy IPO shares at the offering price?

Sometimes. If your broker is part of the underwriting group or has an allocation, you may be able to request shares, but most shares in popular IPOs go to institutional and high-net-worth clients. Most individuals buy once the stock starts trading.

What is a lock-up period?

It is an agreement that stops insiders such as founders, employees and early investors from selling their shares for a period after the IPO, most often 180 days. The terms are disclosed in the prospectus.

Does SEC approval mean an IPO is safe?

No. The SEC reviews the registration statement for disclosure compliance and declares it effective, but it does not approve the merits of the investment or guarantee the information is complete or accurate.

What is the difference between an IPO and a direct listing?

In an IPO, underwriters help sell new shares at a price they set with the company. In a direct listing, existing shares are listed without an underwritten offering and the first price comes from the exchange's opening auction.

Summary

An IPO turns a private company into a public one by registering shares with the SEC, usually on Form S-1, marketing them to investors on a roadshow, pricing them the night before trading, and listing them on an exchange. Underwriters manage the sale and most offering-price shares go to institutions, while insiders are typically locked up for about 180 days. Direct listings and SPAC mergers are alternative routes with their own costs and conflicts. For investors, newly public stocks combine limited history, heavy attention and known supply shocks, so the prospectus deserves careful reading before anything else.