The ABCs of IPOs - A Guide to Understanding Initial Public Offerings

Equity markets are expected to experience an unprecedented year in 2026, where three companies worth approximately one trillion or more are rumored to go public through an Initial Public Offering (IPO). SpaceX was the first to register with a filing on May 20, 2026. Expectations are that both OpenAI and Anthropic, among others, are not far behind. These IPOs are expected to attract significant attention. 

To help inform investors, we are compiling a three-part series where we explore the IPO process, discuss considerations one should have when evaluating specific IPOs, and lastly, how these newly public companies may impact your portfolio.

 

IPO Process 
As companies mature, having access to public equity markets provides an avenue for the investors in the company to trade and monetize their equity along with offering easier access to future capital when needed.  

When companies decide to go public, they are often owned by some combination of their founders, employees, and/or outside investors such as a private equity sponsor. Through an IPO, these owners are looking to monetize, or cash out, all or a portion of their equity in the business. IPOs can also serve as a means to raise capital to reduce debt if the company finds itself overleveraged.  

The IPO process starts with the company filing a registration statement, or S-1, document. This document provides details on the business, its strategy, the management team, financial performance, and the business's underlying risks. The S-1 filing is often followed by a road show, during which the management team meets with prospective investors.  

The IPO process concludes when the investment bank leading the process (the lead underwriter) prices the IPO, often the night before the stock begins trading. The pricing of the IPO incorporates the indications of interest submitted by prospective investors. If demand is high, the IPO can be oversubscribed, meaning the IPO price may be struck above the targeted range, and investors may only receive a proportional allotment of the amount they had targeted. For example, if an investor was looking to purchase 3,000 shares but the IPO was oversubscribed by 3 times, they may end up with only 1,000 shares. Alternatively, if demand is subdued, the lead underwriter may be required to lower the IPO price in order to entice additional interest from prospective investors.   

 

Lock-Ups and Secondary Offerings 

To ensure a smooth IPO process, most initial public offerings sell only a minority of their shares to institutional and retail investors. For example, a company that is owned by a private equity sponsor may only sell 25% of its shares in the initial public offering. This keeps supply low and if demand is strong, it can lead to a strong offering price and sustained demand for shares after the IPO.  

Given that not all shares are issued at the time of the IPO, a common requirement is that investors who did not sell their shares during the IPO must adhere to a post-IPO lock-up, typically 180 days. During the lock-up, investors who held shares prior to the IPO cannot sell them into the public market. Following the lock-up window, they may be allowed to register and sell these shares. Often, shares are sold through coordinated follow-on offerings, in which investors elect to coordinate and sell shares at part of a larger offering. It's not unusual for a follow-on offering to occur shortly after the lock-up period ends. For large companies, there may be multiple follow-on offerings, as investors who owned pre-IPO shares are focused on maximizing the price they receive in the public market and may be patient with the time required to sell all their shares. 

 

Performance of IPO shares 

Participating in an IPO can be an attractive opportunity for investors. Historically, IPO allocations were generally offered to large institutional investors. Over time, private investors have begun receiving allocations, although the overall IPO allocation still heavily favors institutional investors.  

There have been numerous studies by investors and academics examining IPO performance. While the returns of a single IPO can vary considerably from the norm, studies show that IPO shares, on average, perform well on their first day.  Following the first day’s return, performance tends to revert, and by the time the 180-day lockup expires, share prices are more often than not flat to negative relative to their IPO price. 

Recent research conducted by Goldman Sachs’ Chief Strategist, Ben Snider, suggests that during the 30 years between 1995 and 2025, IPOs averaged a 19% return on their first day of trading. However, an analysis between 2013 and 2022 indicated that returns by the end of the first week of trading dwindled to just 2%. Six months following the IPO, the return was virtually flat. This analysis shows that receiving an IPO allocation can prove lucrative if one can effectively sell them on the first day. This, however, has its challenges as we discuss below.  For investors interested in participating in the IPO and remaining long-term investors, they often don’t fare any better, if at all, than an investor who purchases shares following the IPO.  

 

 

Constraints on IPOs 
While participating in IPOs has its merits, the mechanics may challenge the ability of an investor to achieve their intent. First, the IPO syndication process can make it challenging to receive shares in the first place. The underlying company and their lead underwriter influence which brokerage firms are allocated shares. Thus, depending on their brokerage affiliation, an investor may not have access to shares in the first place. Second, an oversubscribed allocation could pare back shares to a level that is less material for an investor, or in some cases, requirements around minimum allocation sizes could even negate an investor's ability to receive any shares.  Finally, selling shares immediately following the IPO is generally frowned upon. Companies that go public are looking for long-term shareholders and generally don’t want allocations to investors who will immediately sell, or flip, shares on the first day of trading. To limit this activity, many brokerages can impose penalties on investors who flip shares, including suspending or restricting their participation in future IPOs.  

 

Conclusion 
In recent years, IPO activity has been subdued. A resurgence in IPOs, alongside expectations of large, well-known companies going public, is drawing renewed attention to the IPO market. It's helpful for investors to understand the IPO process to appreciate the information flow, the timeline, and the impact of initial lock-ups. From a performance perspective, while IPOs have historically presented the potential for attractive early returns, results often fade quickly. Finally, the process for allocating shares and the constraints on trading can impair an investor's ability to achieve the desired outcome with an IPO.  

Composition Wealth LLC ("CW") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CW and its representatives are properly licensed or exempt from licensure. The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. 

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.