Going Public: How Does a Company Turn Shares into Real Money?
A company seeking growth, expansion, or new product development needs one key thing: money. It may come as a bank loan, from private investors (venture capital funds or angels), or from the public through the stock exchange.
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This is exactly where an issuance comes into the picture. In this process, the company offers the investing public the opportunity to buy its securitiesA general term for a tradable financial asset (such as a share, bond, or unit in a fund) that represents a right to an asset or to profits.—usually shares or bondsA type of "loan" that an investor provides to a government or company in exchange for repayment of the principal plus interest.—and in returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. receives cash directly into its coffers.
On paper, this sounds simple and ideal: the company needs financing, investors are looking for an opportunity, everyone buys, and everything is wonderful. In practice, an issuance is a dramatic, complex, and highly charged event. It determines the market value at which the company will begin trading, how much capital it will manage to raise, who will receive the shares, and what the public knows about the company's inner workings before putting its money into it.
The IPO Glossary
So you do not get lost in the paperwork and disclosures, let's clarify the terms that confuse most investors at the beginning:
IssuanceWhat is it?
A process in which a company raises money by selling securities.ProspectusWhat is it?
The company's official and complete identity card. A comprehensive legal and financial document that discloses all the numbers, plans, and risks.UnderwritersWhat is it?
The professional entities—usually investment houses or banks—that accompany the company and manage the marketing and pricing of the issuance.AllocationWhat is it?
The actual distribution of shares. The process that determines how many shares you will actually receive in your account out of the amount you requested to purchase.DilutionWhat is it?
An increase in the company's total number of shares, causing each existing investor's proportional slice of the pie to shrink.
The Road to the Stock Exchange: IPO Stages and the Role of Underwriters
An issuance may be an initial public offering (IPO)—when the company enters the stock exchange for the first time—or a follow-on offering, when an already traded company raises additional money from the public. The stock exchange's official IPO guide describes a series of predetermined stages:
- Working meetings with underwriters and advisors
- Checking compliance with threshold conditions and criteria
- Assessing market conditions and demand
- Publishing a final prospectus to the public
- Receiving orders, allocation, and a ceremonial start of trading
Within this whirlwind, several parties operate around the company: underwriters, distributors, IPO advisors, lawyers, accountants, appraisers, and the stock exchange itself. The underwriters help the company prepare for the process, assess demand from large institutional investors, such as pensionA monthly payment made to a person after retirement from work in order to help maintain their standard of living. funds and insuranceA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. companies, market the offering, and sometimes also assume some responsibility for purchasing securities that remain unsold.
What Is a Prospectus (and Why Is It Not a Buy Recommendation)?
The prospectus is the central and most important document the company publishes before approaching the public. Make no mistake: it is not a glossy marketing brochure. It is a rigorous legal and accounting document intended to provide investors with full disclosure: what the company does, how it makes money, who the controlling shareholders are, its financial condition, the risks, what its capital structure will look like after the offering, and what the money is intended for.
In Israel, as a rule, any offer or sale of securities to the public must be made under an official prospectus whose publication has been permitted by the Securities Authority, or under the exceptions established by law.
Most people will not read hundreds of pages, but a retail investor should know where to pay attention: what the company does, whether it is profitable or loss-making, what the risks are, who the controlling shareholders are, how many shares there will be after the offering, and at what valuation it is asking the public to invest.
Where Does Your Money Really Go?
Before checking whether an offering is “hot,” you need to ask why the company needs the money at all. There is a huge difference between the following two situations, which are sometimes combined:
Where does the money go?
| Aspect | New share issuance (pure capital raising) | Offer for sale (sale of existing shares) |
|---|---|---|
| What happens? | The company creates new shares and sells them. | The company's current shareholders—the entrepreneurs, founders, or existing investors—decide to sell part of their personal holdings to the public. |
| Where does the money go? | Your money goes directly into the company's coffers. It will be used for growth, investments, product development, ongoing operations, or reducing burdensome debt. | The money does not go into the company; it goes directly into the pockets of those owners. |
Both routes are legal and legitimate. But the meaning for investors differs. If the money goes into the company, check what the plan is for it. If the existing shareholders are selling, ask why they are selling now and to what extent. Not every shekel raised in an offering develops the company.
How Is the Price Set, and What Is “Allocation”?
One of the big questions is the price at which the company will sell the shares. The price is influenced by the company's valuation, market conditions, business sector, profitability, risks, and the underwriters' ability to generate demand from institutional investors.
Sometimes the price looks “cheap” to attract buyers; sometimes it is too high because of enthusiasm; sometimes the share will soar on the first day, and sometimes it will crash as soon as trading opens.
The Balance of Power: Benefits for the Company Versus Risks for Investors
Why Is an Offering Good for a Company?
It gives the company access to public money without taking a bank loan and enables it to grow, acquire companies, develop products, and strengthen its balance sheet. In addition, a public company gains more exposure and credibility with suppliers and customers, and it is easier for it to raise capital in the future.
The price the company pays: stringent reporting obligations, exposure of sensitive information, dealing with market expectations, and life under a magnifying glass, with a share price that changes every day.
Why Is an Offering Not Always Good for Investors?
Because an offering is also a sales event. The company, the owners, and the underwriters want the offering to succeed and raise capital at the highest possible valuation. Sometimes companies go public when the market is particularly strong and investors are willing to pay any price, or even before the company has proven profitability.
In an offering, the company sells you a story about the future—your role is to examine whether the price of that story is reasonable, rather than buying just because of the noise or because “everyone is in.”
And Where Does Dilution Come In?
When a company issues new shares, the total number of shares increases, and the proportional stake of existing shareholders decreases.
A simple example
If there were 100 shares and you held 10, you owned 10% of the company. If the company issued another 100 new shares (so there are now 200 shares) and you still hold your 10 shares, your stake would fall to 5%.
Is this bad? Not always. If the company uses the money to create tremendous value, the entire company will be worth much more, and your 5% will also be worth more than the original 10%. But if the offering is made at a low price or without a sound plan, the dilution will hurt you. (We will expand on this in another blog post.)
📋 Checklist: must-ask questions before participating in an offering
If you do not have a basic answer to these questions, you do not truly understand what you are buying:
Before participating in an offering
- What does the company actually do?
- Is it profitable, or is it still reporting losses?
- Why is it raising money now, and what is it intended to fund?
- Does the money go into the company's coffers or into the pockets of existing shareholders?
- At what valuation is the company going public?
- Who are the controlling shareholders, and what will they retain afterward?
- What are the key risks stated plainly in the prospectus?
- Is there a lock-up on insider shares, or can they sell soon?
- How many shares will actually be held by the public, and will they have sufficient liquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties.?
The bottom line
An IPO is not an automatic financial opportunity; it is a business proposition like any other. As investors, it is not enough to ask whether there is buzz or media noise around the company. You must understand what the company is selling, who is selling, where the money is going, and at what price you are being offered entry into this partnership.
Sources and links
- Securities Law, 19681968 — National Legislation Database — The legal basis in Israel for the obligation to publish a prospectus when offering or selling securities to the public.
- Israel Securities Authority and the Stock Exchange — Guide to the IPO process in Israel — A guide describing the stages of preparing for an IPO, publishing a prospectus, underwriting, a public offering, and the start of trading.
- Israel Securities Authority — Authority website — Professional information and publications from the Israel Securities Authority on prospectuses, underwriting, distribution, and public offerings.
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