Difference Between IPO and FPO

Initial Public Offering (IPO) and Follow-on Public Offering (FPO) are two widely used investment terms. Both IPO and FPO are conducted via a stock exchange, which is a market in which securities are bought and sold. The key difference between an IPO and FPO is that an IPO occurs when a company offers its shares to the public investors for the first time by listing the company in a stock exchange. A Follow-on Public Offering (FPO) is referred to the subsequent issue of shares of an already listed company.

What is IPO (Initial Public Offering)?

The main reason that companies decide to consider an IPO is to gain access to further capital by offering shares to a large pool of investors. All businesses start as small-scale private ones utilizing personal or family wealth and funding options such as loan capital, business angels, and venture capital firms. However, the amount of funds that can be accumulated through the said methods are often limited and will not be sufficient if the business objective is to pursue rapid growth. The business may decide to go public when the above-mentioned financing options are insufficient,

Furthermore, an IPO serves as an exit strategy when business angels or venture capital firms are involved since these type of investors are interested in participating only until the business is successfully established. Once this is done, business angels or venture capital firms often seek to sell their stake in the business to other interested parties. In some cases, even the founders of the company may be willing to exert an exit strategy. Thus, an IPO can be based on the requirements of many stakeholders.

Advantages of IPO

• Ability to raise additional finance from a large pool of investors
• Ability to achieve greater liquidity for shares since they are easily tradable
• Ability to offer securities in the acquisition of other companies
• Ability to offer stock and stock options programs to potential employees, making the company attractive to top talent
• Additional leverage when obtaining loans from financial institutions
• Attracting the attention of mutual and hedge funds, market makers and institutional traders when the company’s stock is listed on an exchange
• Filing and registration fee for most major exchanges includes a form of complimentary advertising. The company’s stock will be associated with the exchange their stock is traded on.
• Increases in the credibility with the public since listed companies have significant reporting and compliance requirements.

Disadvantages of IPO

• Listing a company in a stock exchange is a lengthy and time-consuming process which often takes about 6 -9 months and the following steps should be followed.

There are many legal implications and significant legal costs involved with an IPO. The activities of listed companies are scrutinized by the Securities and Exchange Commission (SEC) and the company is bound by a number of rules and regulations and reporting requirements followed by the IPO.

The main objective of reporting requirements is to make sure that the shareholders and the markets are kept informed on a regular basis. A company is subjected to the Reporting Requirements by filing an Exchange Act Section 12 registration statement. Due to the above complications, some of the most successful companies in the world such as Dell, PriceWaterhouseCoopers, and Mars remain private.

What is FPO (Follow-on Public Offering)?

An issue of shares can be done secondarily and further subsequently depending on the requirements of the company. They are popular methods for companies to raise additional equity capital. There are two types of FPOs.

Dilutive FPO

In a dilutive FPO, the company decides to increase the number of shares exchanged in the stock market in order to allow a rapid flow of funds within a relatively short period of time. This is commonly done when additional funds are needed for a special project. A dilution of control may occur as a result of a dilutive FPO.

Non-dilutive FPO

Here, the shareholders sell privately held shares in the stock market without company issuing additional shares. No dilution of control occurs as a result of this type of FPO.

What is the difference between IPO and FPO?

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“Tokyo Stock Exchange” By DocChewbacca (CC BY-SA 2.0) via Flickr