An IPO (or initial public offering) is a process when a private company sells its business crypto assets to the public in new issuance. Why? To raise funds from public investors, the point is that it should submit regulations forcing it to increase its disclosures and transparency.
Before applying an IPO mechanism, a company is usually private and is owned by a small group of stakeholders. The stakeholders can include early investors like founders venture capitalists who can provide money to companies with high potential.
An IPO can be considered as quite a big step for any company and is seen as a milestone for businesses in the cryptocurrency world. In the beginning, cryptocurrencies were embraced as scams or something alike, so companies having connections with cryptocurrencies were seen as fake projects.
If a crypto company wants to start an IPO, it should engage with investment banks, which are parties that estimate and assume risks in exchange for a fee, for launching their coins to the public.
After an IPO, the company’s cryptos trade on a crypto exchange, which is a market where assets are bought and sold. That’s why an IPO is often known as “going public.” Being publicly traded improves the prestige of the crypto company, as it copes with meeting all of its obligations.
Businesses get started being owned privately. Once they reach the point where they can manage with publicly traded benefits and responsibilities, they launch promoting their high interest in being listed on a crypto exchange.
Before being listed, the value of share ownership in a company is determined only in private deals. Right after being listed, the value of the business’ assets is determined by the supply and demand of securities traded on the exchange.
How Does an IPO Work?
When a company has gained a definite bar that allows to handle the responsibilities of being publicly traded and benefit from the prestige, added volume and exposure from an IPO mechanism, it becomes interested in the process of going public.
There are underwriters or investment banks that lead the IPO process, they are chosen by the company. Those underwriters are involved in all aspects of the IPO including due diligence, preparing the documents, filing, marketing, and release.
There are a few steps that should be taken:
- Hire an investment bank or an underwriter;
- Register for the IPO;
- Receive verification by a market regulator;
- Apply for a crypto exchange;
- Become a buzzword in the crypto field;
- Decide the IPO pricing;
- Determine the number of assets.
IPO vs ICO
IPO’s Pros and Cons
An IPO can help cryptocurrency companies to increase the exposure and prestige that comes with being publicly traded.
Publicly traded companies must raise their transparency because they need to update investors and shareholders on their financial and strategic situation. Higher clarity and the prestige of all regulatory requirements to IPO and having a public listing give crypto companies a better public reputation.
A company’s increased exposure can bring in new customers, as well. That’s because those crypto companies that have worked with regulators and crypto exchanges to IPO are considered to be more reliable. The obligatory reporting makes a crypto company’s financial situation clearer, leading to more beneficial credit borrowing terms.
As anyone can buy and sell the company’s assets, the liquidity of these coins increases. A liquidity boost raises value for existing coin holders because it makes it easier to sell their holdings partly or all at once.
An IPO gives access for a company to public markets and a possibility to raise additional funds through secondary offerings more quickly and easily. The secondary offerings should be the sale of new or privately held coins of a company that made an IPO.
A secondary offering may reduce the price of other coins on the market by minting new coins and offering them for public sale. Another option is possible when one or more major coin holders can sell their holdings in a secondary offering when they profit from the deal.
Once a company is publicly traded, it can also offer compensation in its coins, which are more liquid because they are listed on a crypto exchange.
As for the cons of the IPO, the mechanism adds some risks and expenses for a company, and they may be that serious that many companies would rather remain private.
The process itself is pretty costly. The company needs to hire underwriters or investment banks. Above all, the expenses of making reports on a company’s situation every quarter, that’s an absolute must, become continuous and unconnected to their business operations. Legal and accounting costs rise, too, as the company needs to be compliant.
Another problem with an IPO is that publicly traded firms need to reveal financial, strategic, and other important information that can lead to face some rivals who may use that information. Making the company’s data more transparent allows the company to gain more prestige and have better loan borrowing terms. Still, on the other side, it affects their businesses by adding new competitors.
Another crucial con of an IPO is that it meets activist investors. Activist investors buy huge stakes in public companies to impact how they are run and can use their influence on the company’s direction. The results of such power may not always be positive for the long-term perspectives.
An IPO can be conducted without any underwriters or banks. This option means that the issuer has more risks if the offering does not go well, but it can be vice versa, and they may profit from a higher share price. A direct offering is often possible for a company with a well-known brand and a potential project.
An IPO price is not fixed in a Dutch auction. Potential buyers bid for the shares they want to buy and the price they are ready to pay. The bidders who pay the highest price are then allocated the shares available.
An IPO Investing
When a company decides to raise money via an IPO it is only after careful consideration and analysis that this particular exit strategy will maximize the returns of early investors and raise the most capital for the business. Therefore, when the IPO decision is reached, the prospects for future growth are likely to be high, and many public investors will line up to get their hands on some shares for the first time. IPOs are usually discounted to ensure sales, which makes them even more attractive, especially when they generate a lot of buyers from the primary issuance.
The IPO’s price is usually fixed by the underwriters through their pre-marketing process. The price is based on the valuation of the company using fundamental techniques such as discounted cash flow, which is the net present value of the company’s expected future cash flows. Other methods include equity and enterprise value, comparable firm adjustments, etc.
Investors will monitor news but the main source for information is a called prospectus, which is available when the company files its S-1 Registration. The prospectus provides a lot of useful information. Successful IPOs are usually supported by big investment banks that can promote a new project well.
- An IPO prospectus — a required document that includes a description of the company and its operations, the terms and conditions of the IPO, and other information an investor may need to make a decision to invest.
The pre-marketing process typically includes demand from large private accredited investors and institutional investors, which heavily influence the IPO’s trading on its opening day. Investors in the public don’t become involved until the final offering day. All investors can participate but individual investors specifically must have trading access in place. The most common way for an individual investor to get shares is to have an account with a brokerage platform that itself has received an allocation and wishes to share it with its clients.
5 Crypto Companies That Can IPO in 2022
Stock market IPOs are highly possible in the following year, as many crypto-related and blockchain companies are ready to go public. Anyway,
these are only names that are in the air and to have a look at if you’re interested in IPOs.
Stripe could go public already as in November the company commented it is open to accept crypto for payments, three years after ending Bitcoin support.
Stripe managed to raise $600m with a $95bn of valuation, it can make this company one of the biggest IPOs in history because of the growing under pandemic interest towards e-commerce.
The data management blockchain company could go public, as well. Databricks which has raised a total of $3.6 billion designs tools to help companies see structured and unstructured data in a single location—what they call a data “lakehouse” — without moving between different systems.
The company has about 5,000 clients in different countries and says it’s on its way to obtaining even more.
This cybersecurity company based in Boston and called Cybereason has a couple of big things to share with us.
It raised about $750m in financing led by Liberty Strategic Capital. According to Reuters, the company filed for a stock market listing in the U.S. at a reported $5 billion valuation.
London-based digital bank Revolut could go public in 2022 – possibly in a London listing.
The company is believed to have about 15 million customers and was last valued at $33bn in a Series E funding.
The platform links content creators such as musicians, podcasters, bloggers, and artists with their fans and followers, and offers tools for those artsy people to help them monetize their content, offering NFTs as well.
As Patreon chief said: “IPO on the table” but not all creators will benefit.”
IPO's are not for newbies, they are for sophisticated investors and traders for sure.
It is a complicated process for a typical investor to buy directly into an IPO. Still, soon after an IPO, a company's shares are released for the general public to buy and sell. So since you trust a company after thorough and serious research, it may be pretty profitable to invest in a growing company when the shares are new.