Know the Difference Between IPO and FPO

Investors and businesses often encounter the terms Initial Public Offering (IPO) and Follow-on Public Offering (FPO) in the financial markets. Both are significant events in a company’s lifecycle, involving the issuance of shares to the public. However, they serve different purposes and have distinct characteristics. Here’s a detailed look at the differences between IPO and FPO.

What is an IPO?

Definition

An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time. This transition from a private to a public company allows the firm to raise capital from a broad base of investors.

Purpose

Capital Raising: To generate funds for expansion, research and development, debt repayment, or other corporate purposes.
Market Visibility: To increase the company’s visibility and credibility in the market.
Liquidity: To provide an exit strategy for early investors and employees with stock options.

Process

Preparation: The company appoints underwriters, usually investment banks, to manage the IPO process.
Regulatory Filings: The company files a registration statement with the relevant regulatory body, such as the Securities and Exchange Commission (SEC) in the U.S.
Pricing: Based on demand, market conditions, and company valuation, the underwriters set an IPO price.
Roadshows: The company and underwriters present the business to potential investors to generate interest.
Launch: The shares are offered to the public and start trading on a stock exchange.

Advantages

Access to Capital: Provides substantial capital influx.
Enhanced Public Image: Increases brand awareness and market reputation.
Employee Incentives: Offers stock options as part of compensation.

Disadvantages

High Costs: Involves significant legal, accounting, and underwriting fees.
Regulatory Compliance: Requires ongoing disclosure and regulatory compliance.
Market Pressure: Exposes the company to market volatility and pressure from shareholders.

What is an FPO?

Definition

A Follow-on Public Offering (FPO) is an issuance of additional shares to the public by an already publicly traded company. It is also known as a secondary offering.

Purpose

Additional Capital: To raise more funds for business expansion, debt reduction, or other corporate needs.
Public Float: To increase the number of shares available in the market, improving liquidity.

Types

Dilutive FPO: New shares are issued, increasing the total number of outstanding shares and potentially diluting existing shareholders’ ownership.
Non-Dilutive FPO: Existing shareholders, such as company insiders, sell their shares, which does not increase the total number of outstanding shares.

Process

Announcement: The company announces the FPO and its purpose.
Regulatory Filing: Similar to an IPO, a prospectus is filed with the regulatory body.
Pricing: The price of the FPO is usually at a discount to the current market price to attract investors.
Offering: Shares are made available for purchase by the public.

Advantages

Capital Raising: Provides additional funds for the company without the extensive process of an IPO.
Increased Liquidity: Enhances the liquidity of the company’s shares.
Market Confidence: Indicates confidence in the company’s future prospects.

Disadvantages

Dilution Risk: Can dilute the value of existing shares if it is a dilutive FPO.
Market Perception: May be perceived as a sign that the company is in need of cash, which can impact stock prices negatively.

Key Differences Between IPO and FPO

Stage of Company

IPO: Conducted by a private company transitioning to a public entity.
FPO: Conducted by an already publicly traded company.

Purpose

IPO: Primarily for raising initial capital and gaining public market access.
FPO: For raising additional capital or increasing share liquidity.

Complexity and Cost

IPO: Generally more complex and costly due to the extensive preparation, regulatory requirements, and marketing efforts.
FPO: Less complex and costly compared to an IPO, as the company is already public and familiar with regulatory compliance.