February 1st, 2012
06:08 AM GMT
UPDATE: It's official. Late Wednesday Facebook filed paperwork for a $5 billion IPO. And the company reveals for the first time how much cash its making. Read more here.
(CNN) – The Facebook IPO, or initial public offering, promises to be “the holy grail” of tech IPOs, possibly the biggest ever.
Reports in the Wall Street Journal and New York Times suggest the company is seeking to raise $5 billion – more than double Google’s $1.7 billion IPO in 2004, which remains the largest tech IPO in history, according to Renaissance Capital.
CNN’s Christine Romans explains IPOs, and what it means for Facebook.
An IPO is when a company, whether It's a mom and pop store or a social network conceived in a Harvard dorm room, can attract vastly more capital to grow its operation.
You can get investors to pay for shares of your company which are publicly traded on a stock exchange like the NASDAQ or the NYSE.
Why go public?
Money. With public investors putting money into your enterprise, it allows you to raise money quickly. Also, as is apparently the case with Facebook, it was heading toward a legal limit of more than 500 private investors, which U.S. law then requires the books be opened for public scrutiny.
Why stay private?
One of the downsides is when you are a public company you are scrutinized by the government. You have to every quarter file your numbers, your balance sheet to stock exchange regulators.
If you're a private company you don’t have that kind of scrutiny you don’t have investors selling their stakes in your company if you have one or two bad quarters.
Who can buy shares?
Eventually it’s everyone – such as through mutual funds or bought outright by individual investors, say in an E*TRADE account or something. But at an initial public offering, it's the big names who get in, and original investors and founders of the company get a good shot to buy more, if they desire.
Once the stock starts trading – which could be several months down the line – it will answer one big question that has hovered over the internet giant: How much is the company worth? Some say it could reach $100 billion. Also we will know how much money the company makes, and a more transparent sense of Facebook's business strategy.
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