The other drawback to this model is that the institution first has to give away most or all of its equity to its members, either in the form of cash or as free shares, before it can raise any new capital. This reduces the benefit of going public for both the company and its new investors. For a mutual that wants to go public, conversion presents an alternative to demutualization. The new stock is then listed on an exchange, and the shareholders rather then the policyholders now own the company. Because the mutual's policyholders are the owners of the insurer's equity, in exchange for their ownership interest they are provided with subscription rights that entitle them to the first opportunity to purchase the shares the insurer offers when it goes public.
Conversions also differ from other types of IPOs in the way the shares are priced.
This difference helps to make conversions inherently very profitable for investors. Before going public, a typical company is owned by the people who invested in the company when it was formed. These initial investors are entitled to receive a portion of the proceeds generated in the IPO to pay back their original investment, plus a reasonable profit for the risk they took by investing in the company. In a conversion, the members are the original investors, however they do not receive any portion of the offering proceeds or the company's equity paid out to them. Therefore, for their investment, participants in a conversion IPO are getting the company's existing equity plus the proceeds raised in the offering.