Facebook Goes Public: What is an IPO?

Facebook filed a $5 billion IPO on Wednesday, meaning that the social media giant will become a publically traded company, and anyone will be able to buy shares of Facebook starting this spring. There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future, said Mark Zuckerberg, Facebook's CEO, in a letter that accompanied the filing. The scale of the technology and infrastructure that must be built is unprecedented, and we believe this is the most important problem we can focus on.

What is an IPO?

IPO is short for initial public offering, and is the first sale of stock to the public by a private company. When a company, such as Facebook, files an IPO, it allows them to raise money from the public. Many companies use an underwriter, a banker who deals chiefly in investments and IPO's, to help assess the value of the company and gauge what their share price should be. Facebook used Morgan Stanley as its lead underwriter, and was valued between $75 billion and $100 billion, according to Reuters.

What are the benefits of an IPO?

Filing an IPO allows a company to obtain money from a broader pool of investors without getting into debt, according to IPO Initial Public Offerings, an organization that helps companies go public, Money a company brings in from sale of stock does not have to be repaid. Any money from an IPO or a sale of stock goes directly to the company, which it can then use to expand, pay debts, or use as working capital. Companies can raise large amounts of money very quickly through an IPO. In Facebook's case, one reason for filing for an IPO was to attract better employees, which they can do by offering stock options. The fight for technical talent is really high and the ability to find really great employees is difficult, Chamath Palihapitiya told Bloomberg TV. So ultimately, I think we're moving to a world where the ability to tell a potential recruit, 'hey in two years, you'll be able to sell a part of your vested holdings,' will become the trump card.

What are the drawbacks of an IPO?

There are some drawbacks to filing an IPO, however. Aside from the immense amount of time and paperwork that goes into filing an IPO, there is considerable risk that funding will not be raised. In addition, once a company files an IPO, they are required to disclose financial and business information, and disseminate financial information that could potentially be useful to competitors.

What is the procedure to have an IPO?

The company and the underwriter will meet to negotiate a deal. They will decide on how much money to raise, and other details of the underwriting agreement. The sides can agree to a firm commitment, in which the underwriter will guarantee that a certain amount will be raised, or a best efforts agreement, where there is no guarantee. In a firm commitment, the underwriter will take a much higher commission.

Once all sides agree to a deal, the investment bank files documents with the SEC. This document contains information about the company, such as financial information, debts, management background, legal problems, and how the money will be used. The SEC will then investigate and ensure that all information is disclosed. Once the SEC approves the offering, a date (the effective date) is set when the stock will be offered to the public, according to Ventura.com.

When can I buy Facebook stock?

With Facebook's IPO filed, the SEC will now look to ensure that Facebook provided all the pertinent information. Once they decide that it has, they will set a date when stock will go on sale. Best estimates are that stock will go on sale between April and June.