How Does an IPO Work? The Full Process, Step by Step

Historically, an IPO is the first time a company sells shares to the public. A company hires investment banks, files a disclosure document and markets the offering. It then sets an offer price, allocates shares and starts trading.

The rules behind this process keep moving. FINRA's amendments to Rule 5123 took effect on October 21, 2026, and its amendments to Rule 5110, which covers underwriting terms and arrangements in public offerings, are scheduled to take effect on December 21, 2026. If you follow IPO news, the vocabulary below is what you need to read it properly.

Key takeaways

• Historically, an IPO is the first time a company sells shares to the public.
• Money from newly issued shares goes to the company, money from existing shares goes to the sellers.
• FINRA's Rule 5110 amendments on underwriting terms are scheduled to take effect December 21, 2026.

What an IPO is, in plain words

Historically, an IPO is the first time a company offers its shares of capital stock to the general public. In the US, the company files a registration statement with the Securities and Exchange Commission. The SEC is the US markets regulator. The company may sell shares only once the SEC declares the filing effective.

An IPO can create a market for a company's shares, but getting listed on an exchange is a separate step. The company usually applies to an exchange and has to meet its listing standards. After the offering, it becomes subject to public reporting requirements.

What changes for the people inside the company depends on the offering itself. Newly issued shares can bring in public investors and dilute existing ownership. Shares sold by existing holders turn part of their stake into cash. A listing does not mean every existing owner sells, or that ownership transfers wholesale.

Why companies go public

The SEC lists documented reasons companies give for going public. These include raising capital, improving access to capital and making shares easier for owners and employees to trade. Companies may also use shares to acquire businesses, attract or compensate employees, and gain publicity, brand awareness or prestige. Those are possible reasons, not guaranteed outcomes.

The other side of the trade is ongoing. A US public reporting company generally files an annual Form 10-K and quarterly Form 10-Q reports. Certain significant shareholders, officers and directors may have separate ownership and transaction reporting duties. Shareholders can vote on matters such as director elections. Exchange rules also impose board and committee standards. Some rules have exceptions or start gradually.

How an IPO works, step by step

1. Pick the underwriters. An underwriter is an investment bank that manages and sells the offering. It markets the offering and gathers investor interest. In a typical US IPO, a syndicate agrees to buy shares from the company and sell them to investors. A syndicate is a group of underwriters. A lead manager coordinates the group.

2. Due diligence. Due diligence means checking whether a company's important disclosures are accurate and complete. Underwriters review its financial condition, financial statements, management, business prospects, assets, contracts, litigation, compliance and industry or competitive risks. There is no single rigid checklist, because the SEC says the required reasonable investigation depends on the facts and circumstances of each offering.

3. File the disclosure document. In the US, Form S-1 is the usual registration statement filed with the SEC for an IPO. The filing includes a prospectus describing the business, finances, results, risks and management, along with audited financial statements and exhibits. A prospectus is the document an investor is meant to read before deciding.

4. The European version of that step. For an IPO on an EU regulated market, the comparable document is generally a prospectus. It is prepared under the EU Prospectus Regulation and approved by the relevant national regulator before publication. It must give important information about the company's assets, liabilities, results, financial position and prospects. It must also cover the rights attached to the shares and the reasons for and impact of the issuance. Risk factors must be material and specific.

5. Apply to the exchange. Listing is its own step, with its own standards to meet.

6. Book building. Underwriters collect indications of interest. These are preliminary, non-binding signals of how many shares an investor may want and sometimes at what price. The underwriters combine them into an order book to gauge demand.

7. Pricing. The company and the underwriters negotiate the offer price. They use investor demand, market conditions, revenues, customers and financial results. Comparable listed companies may also inform the range. The underwriters can recommend a price, but the company ultimately sets it.

8. Allocation and first trading day. Demand also helps decide how many shares to offer and how to allocate them. An indication of interest does not guarantee an allocation. Then the shares start trading. For the investor's side of this, see our guide to investing in an IPO.

Who actually gets the money

This is the part most coverage skips. Primary shares are newly issued by the company, and selling them raises funds for the company. Secondary shares are already-owned shares sold by existing shareholders, and those proceeds go to the sellers, not the company.

An IPO can combine both. The prospectus identifies the shares offered by the company and the shares offered by any selling shareholders.

Once the shares trade on an exchange, you are buying from another investor. The company is not receiving that money.

Can you buy at the offer price?

Sometimes, and it depends entirely on the offering. European IPOs have no standard allocation split. The deal documents describe investor categories, any tranches and the allotment arrangements. Tranches may include institutional, retail, employee or other groups. Institutional investors commonly submit demand through book building. Retail and employee allocations depend on whether the offer includes those tranches and on the stated allotment method. Employees are not automatically entitled to IPO shares.

There is also no universal IPO price or fee for the process itself. Each company and its underwriters set the offering price, and underwriting compensation is typically a percentage of that price. Real offer prices vary widely: Fast Track Group's IPO price was $4.00 per share per its prospectus dated May 22, 2025, Buda Juice's was $7.50 per share per its prospectus dated January 7, 2026, and Reformation's was $15.00 per share per its prospectus dated July 29, 2026. Those are offer prices, not later trading prices.

The offer price is agreed before trading. It is not a guaranteed measure of what the shares will be worth afterwards.

What changes after the listing

Reporting becomes routine and public. The 10-K is filed each year and the 10-Q each quarter. Certain insiders report their own holdings and trades. Shareholders can vote on things like who sits on the board.

The rules themselves can still shift. At an SEC advisory committee meeting on October 27, 2026, SEC Chair Paul Atkins said staff had been directed to explore possible changes to IPO communications rules, but he described options under consideration rather than adopted rules, so the meeting did not change what an IPO requires today. Newly listed shares also move with the wider market, as the November 2026 sell-off showed.

Risks

• The offer price is an estimate based on demand and comparable companies, not a guaranteed measure of later trading value.
• An indication of interest does not guarantee you receive any shares.
• The reasons a company gives for listing are possible aims, not guaranteed outcomes.
• Newly issued shares can dilute existing ownership, so an employee or founder stake can represent a smaller share of the company afterwards.
• Disclosure rules differ by market, so a US filing and an EU prospectus do not contain identical information.

This article is for information only and is not investment advice.

Frequently asked questions

Is an IPO the same as being listed on an exchange?

No. An IPO can establish a market for a company's shares, but exchange listing is a separate step: the company usually applies to the exchange and must satisfy its listing standards. After the offering it becomes subject to public reporting requirements.

Who decides the final IPO price?

The company does. The underwriters run the book building, see the demand and may recommend a price, but the company ultimately determines the IPO price. The negotiation uses investor demand, market conditions and analysis of the company's revenues, customers and financial results.

Do employees automatically get shares in the IPO?

No. Retail and employee allocations depend on whether the offer includes those tranches and on its stated allotment method, and employees are not automatically entitled to IPO shares. What happens to shares an employee already holds depends on the plan and the offering terms. This is not tax or legal advice.

Does the company receive money when I buy shares after listing?

No. The company raises funds from primary shares, the newly issued ones sold in the offering. Buying later means buying from another investor. A company can raise money again by issuing new shares in a later offering.

What does a prospectus actually have to tell me?

Under the EU Prospectus Regulation, it must give material information for an informed assessment of the company's assets, liabilities, results, financial position and prospects, the rights attached to the securities, and the reasons for and impact of the issuance, with risk factors that are material and specific. In the US, the Form S-1 prospectus covers the business, finances, results, risks and management, with audited financial statements.

Sources

• U.S. Securities and Exchange Commission: Reformation Inc. prospectus (July 29, 2026)
• U.S. Securities and Exchange Commission: Remarks at the Small Business Capital Formation Advisory Committee meeting (October 27, 2026)
• Investor.gov: Initial Public Offerings: Why Individuals Have Limited Access
• U.S. Securities and Exchange Commission: What is a registration statement?
• U.S. Securities and Exchange Commission: Investor Bulletin: Investing in an IPO
• EUR-Lex: Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading
• FINRA: Regulatory Notice 26-19

Cover photo by Luís Perdigão on Unsplash.