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SolarWinds, OpenTable Launch IPOs; Basics of "Going Public"

After a dry spell in terms of companies going public (bailout references aside), this week saw two once-small technology companies launch initial public offerings (IPOs). For those whose IPO memory has evaporated in the recent economic desert, and for those who hear the term tossed about, here are some basics about what launching an IPO and "going public" means.

This Wednesday, SolarWinds, Inc., a network management software company out of Austin, Texas held its IPO, which according to reports from the Wall Street Journal, was well received.

Today, OpenTable, Inc., a San Francisco based company offering a popular online restaurant reservation system, went public and so far share prices have increased. The Journal notes that OpenTable's IPO is the first IPO of a company backed by Silicon Valley venture capital in 15 months.

Business Week reported that SolarWinds and OpenTable are only the third technology company IPOs this year (after Rosetta Stone, Inc.).

So, what exactly does it mean to "go public"?

An IPO is a company's first sale of a stock to the public. Most small businesses (and many large) are privately held. Ownership shares of these companies can't be bought by the public, but these companies also have far fewer reporting requirements. Why do companies go public? To raise capital. Offering securities brings the company instant money, and allows the company to later issue new stock if desired.

Typically, IPOs involve one or more investment banks as underwriters. The underwriters often help the company design the types of securities it wants to sell (different classes of shares, for example), and later, help with the difficult task of picking an offering price. Because the company going public and their underwriters control the IPO, they can often control which preferred investors get access to the initial purchase.

While this is the norm, as Google illustrated with its Dutch auction style IPO, it doesn't have to be.

Before any IPO, the company must submit a registration statement and preliminary prospectus to the Securities and Exchange Commission (SEC). These documents must include audited financial statements and a host of other details about the company, its officers and directors. During a "cooling off period," the SEC attempts to make sure that no material information has been omitted. If the registration statement and prospectus are approved, a date is set for the IPO.

While the boost in capital allows some well positioned companies to profitably expand after an IPO, there are many factors making an IPO less feasible or less desirable to others. These include: the huge cost of preparing an IPO, increased scrutiny of the company, and decreased control for some existing shareholders, amongst others.