The IPO Process before Equity CrowdFunding

Most laymen do not fully understand the IPO process. In fact, casual investors or investors who have a limited amount to invest rarely understand it either. To help people better understand, weʼll share some information on the IPO process and more importantly, why the IPO is normally higher than following shares.
According to one study done in part by the NY Stock Exchange, the casual or ordinary investor has a definite disadvantage in the IPO markets. Larger, institutional investors have benefit of prior market information. It is a complicated and difficult process to move the IPO from the company to the casual investor. The Securities and Exchange Commission (SE) wants to streamline and clarify the process for the ordinary, casual investor.
To make better sense of this whole process, let us look at how a company initiates an IPO from beginning to the actual release onto the market. It starts with the company.
THE PRIVATE COMPANY
A private company seeks to gain capital, money, for additional projects or research. To do this, they decide to sell shares of the business, stocks, to the public. To do this, they have to first make a proposal to the SEC, the watchdog group of the government who makes certain no shady deals take place. This long and involved document is called the “S-1 Document.” Most often an attorney will write this document.
PERMISSION AND SALE
 – If it is a private company, the company must have permission of private stockholders to sell. This may be a complicated process that requires deals and talks, again costing the company additional money. The S-1 document drives the vote of the private investors, and once a vote to sell publicly is made, the company signs on with an stock exchange group and selects a stock symbol.
THE UNDERWRITER
 – All IPOʼs begin with an “underwriter,” normally an investment bank that will assist in the company issuing the IPO. The investment bank makes a determination of whether or not the company has a product or service that will be profitable. Of course, there are some inherent risks in this step, so the company has to make itself look as good as possible to the underwriter. This takes time, effort and a positive promotional campaign to the investment bank. All of this costs the company money, which they hope to recoup via the IPO.
SELLING THE SHARES
 – The investment bank or underwriter then takes the shares of the companyʼs stock and attempts to sell them to investors. A percentage of the stocks are held by the investment bank for fees. The first group of investors that buy shares are normally the larger investment companies. Considerable research into the company selling the shares is done by the investment companies, so the IPO company has the huge task of making themselves look as profitable as possible during this crucial time period. Normally, these first investors buy large amounts of stock direct form the company, so money is funneled back to the company.
OPEN TO PUBLIC – 
Once the investment teams have made their purchase, the larger investors trade their shares on a public market. The average investor now has an opportunity to buy shares.
Deciding an initial price for the IPO is a critical. Too high and the stocks will not sell; too low and the stocks will sell too quickly and the investors will not recover their costs. The company offering the IPO puts a percentage, not the entire amount, back into its coffers. A small percentage, normally less than 10 percent, is held by the groups and people who pushed the IPO through, the investment bank,
underwriters, lawyers and accountants who helped with the initial process.
So as you can see, it is a very difficult and expensive process to open an IPO.
Each different step takes additional time and money to move the process to the next step. Each group in the process wants to recover some of the money spent, so ultimately the ordinary investor will pay a moor for a share of stock than the investment companies and banks. In time and if it is lucrative, the ordinary holders will recover their investments as the company turns a greater and greater profit.