A Basic Understanding of Initial Public Offerings
Table of Contents
Creation of IPOs
2
Contract
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2
Structured Agreements
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2
Underwriters
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2
Securities and Exchange Commission (SEC)
2
Registration Statement
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2
Investigation
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3
Prospectus
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3
Red Herring
3
Road Show
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3
Price
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3
IPO Allocation
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3
Institutional Investors
3
Individual Investors
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4
Researching an IPO
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4
Key Elements
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4
Lockup Period
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4
Flipping
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4
Overall IPO Basics
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5
Form
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5
Categories
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5
Reasons to go Public
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5
Internet Boom
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6
References
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.
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7
A Basic Understanding of Initial Public Offerings
Initial Public Offerings (IPOs) are common ways for small companies to grow and expand by increasing their availability of capital. The Initial Public Offering started seeing a strong increase in popularity in the late 1990's. As a result of the growing popularity resulting in the dot com explosion, the term "IPO" became a household name. In order to understand how IPOs work, its best to first know how IPOs are created.
IPOs are created by underwriters. The first step in creating the IPO is to hire an investment bank and negotiate a contract. The contract will state the type of securities (either stocks or bonds), the amount of capital to be raised, and the details of the actual underwriting agreement. The company and the investment bank determine the structure of the contract. There are two different types of structured agreements. The first type of structured agreement is the firm commitment agreement, in which the underwriter guarantees that a certain amount of capital will be raised. This is done through buying the entire offer and reselling it to the public. The second type of structured agreement is the best effort agreement, in which the underwriter will sell the securities for the company but does not guarantee how much capital will be raised. To protect themselves with IPOs, an investment bank will often form a syndicate of underwriters. When a syndicate is formed, a lead underwriter will be in charge of the syndicate, while the others will each sell a portion of the securities issued. Once a contract agreement is reached, the investment bank files a registration statement with the Securities and Exchange Commission (SEC) (IPO, 2005).
The registration statement contains information about the offering itself along with other information about the company, such as the company's financial statements, management background, any legal issues the company may be involved in, insider holdings, and where the raised capital will be used within the company.
launch the stock price of this company, and incentivize new investors to lend shares for new capital.
You must have something to trade . . . Stock. Stock is a form of a security which is an investment that one makes where the investor is completely dependent on the efforts of another person. There are many benefits to going forward with an IPO. Transitioning from a closely held corporation to a publicly traded corporation can allow the early investors to capitalize financially on their investment. An IPO may also inject much needed capital into the corporation. CB at 800. The sale of securities is regulated by the Securities Exchange Commission (SEC). The SEC created specific laws with the 1933 Act in order to protect investors from fraud, while the 1934 Act provided a private cause of action. CB at 729. For a corporation to sell its stock shares publicly, it must be registered or have an exemption from registration. In registering, the corporation must file a statement providing corporate details concerning its financials and much more information that potential investors would want to know.. CB at
Although most IPOs are underpriced, the level of underpricing varies across IPOs with different issue characteristics, allocation mechanisms, underwriter reputation, and general financial market conditions. For example, the level of underpricing is reduced for larger IPOs, those underwritten by prestigious investment banks, firms with a longer operating history or more experienced insiders on the board, and those which intend to use the proceeds to repay debt. On the other hand, technology firms, firms backed by venture capital, firms with negative earnings prior to the IPO, or firms that went public during a bull market experience greater underpricing.
This transformation process begins with an Initial Public Offering (IPO), which in most cases is a very difficult and intensive process (Phung, 2006b). An IPO is a formal, regulatory procedure that involves extensive documentation and is followed by a process of changes a company must go through in order to attain public status. The three phases include a pre-IPO transformation phase, an IPO transaction phase and a post-IPO transaction phase (Phung, 2006b). Running a publically-traded company is a completely different playing field which requires a company to restructure their management practices, organizational procedures and corporate governance (Clarkson, 770). Above all, shareholders must aim to maximize the company’s value by enhancing its growth strategy and projected profits in order to persuade investors to trade purchase shares. Completion of the pre-transformational phase will normally take about two years (Phung,
Many times a company is looking to expand its operation or may be seeking to go on a completely different direction than when it was first funded. This can be done by both a publicly traded company and a non-publicly traded company, which is also considered a private company. When a private company does go public is known as an initial public offering (IPO). Whatever the status of the company, though both benefits and drawbacks to issuing additional shares of stock. One obvious drawback is known as diluting the ownership of existing shareholders by reducing their actual ownership in the company on a percentage
The day before the registration becomes effective and sales begin, the offering is priced. The investment banker should recommend a price per share for management’s approval, taking into account the company’s financial performance and competitive prospects, the stock price of comparable companies, general stock market conditions, and the success of the road show and ensuing expressions of interest (Kuratko, 2017, p.432). The IPO is successful if the stock offered at a price higher than the stock trades on day one.
An IPO is an Initial Public Offering when a company first starts to sell shares to the public. This is the first opportunity that customers will have to purchase such shares when the trading first begins on the IPO.
The prospectus must include all information reasonably required by investors and the professional advisers to make decision (s710 CA).
However “given the delays which can be encountered in the registration process, the promoter of a company may wish to enter into contracts `for’ the company prior to its incorporation” . An example of this may be a promoter wanting to ensure a company will have stock on hand so it will be ready to operate when its registered. He might order stock and sign the contract in the unregistered company’s name. Since a company did not exist before registration it could not sign a contract itself or appoint an agent to sign on its behalf. Therefore promoters could not be seen as the company’s agent. Circumstances such as this are problematic and raise difficult questions as to the enforceability of the contract and the availability of damages for its breech.
The IPO was oversubscribed 53 times as of 24th February. Retail investor’s portion was oversubscribed 4 times by 23rd February. This was first time that the retail portion in an IPO is oversubscribed before the qualified institutional investors (QIB) and non-institutional investors (NII). As mentioned by an investment banker, as the sentiment was bad for the IPO market and for the issue to sail through, they have intentionally left money on the table anf the price was kept low.
Promoters make arrangement for the office, factory, machinery, staff, allotment of the shares and debenture. They take all steps for obtaining the certificate of commencement of the businesses.
The primary market is a financial market through which companies sell their new issues of shares through an initial public offering (IPO). An investment intermediary, such as an investment bank, will help to underwrite and manage the issuance for the first time. Subsequent trading of stock will then be processed at the secondary market (Mushkin & Eakins, 2012; Hubbard & O’Brien, 2014).
Companies Act, 2013 provides that both public as well as private companies may issue securities. Chapter III of the Companies Act, 2013 deals with Prospectus and allotment of securities. This chapter is divided into two parts, Part I deals with Public Offer and Part II deals with Private Placement. Public offer includes IPO (initial public offer) or FPO (further public offer) of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder of the company, through issue of a
New online retail brand e.g. Amazon, Lastminute.com - Essentially these companies could not have been conceived without the creation of the Internet. New companies sprang up as the Internet began to be adopted. Entrepreneurs were investing heavily in all sorts of start-ups. Some were successes, most were not. [pic]
* The amount of capital to be raised and the number of shares to be