IPO

Initial public offering (IPO)

Definition

The first offering of a company's shares to the public known in the UK as a flotation. IPO was originally an American term but is increasingly being used across all world markets The shares offered may be existing ones held privately, or the company may issue new shares to offer to the public.

There can be lots of reasons why companies offer shares to the public:

§  the directors want to raise new capital for the company

§  the directors want to widen the shareholder base of the company

§  the shareholders want to have a liquid market in which to trade their shares

§  the directors want to be able to use 'paper' to make acquisitions

§  the directors want the publicity that a public listing brings

In recent years there has been a tendency for companies to list on the market by a private placing of shares to institutions rather than public offerings. This is partly because the costs of a placing are far lower than an offer for sale, and partly it is because in 1996 the Stock Exchange scrapped its rule requiring that new issues worth more than £50m should offer a proportion to the public.

Whatever the reason, it rankles that members of the public are so often denied the chance to 'get in on the ground floor' while institutions clean up. The internet may reverse the trend, however. There have already been several online flotations in the USA and Europe in which private investors get full participation rights. These are sometimes referred to as EPOs (Electronic Public Offerings).

One of the advantages of buying shares in IPOs is that they do not attract Stamp Duty (0.5% tax normally paid on share purchases) and since you can buy direct from the issuing company you can avoid broker's commission.

Initial public offering

From Wikipedia, the free encyclopedia.

In financial markets, an initial public offering (IPO) is the first sale of a company's common shares to public investors. The company will usually issue only primary shares, but may also sell secondary shares. Typically, a company will hire an investment banker to underwrite the offering and a corporate lawyer to assist in the drafting of the prospectus.

The sale of stock is overseen by financial regulators and where relevant by a stock exchange. It is usually a requirement that disclosure of the financial situation and prospects of a company be made to prospective investors.

In the United States, the U.S. Securities and Exchange Commission (SEC) regulates the securities markets and, by extension, enforces the legal procedures governing IPOs. The law governing IPOs in the United States includes primarily the Securities Act of 1933, the regulations issued by the SEC, and the various state "Blue Sky Laws".

Initial Public Offering - IPO
	The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. Also referred to as a "public offering".
	IPOs can be a risky investment. For the individual investor it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data to analyze the company with. Also, most IPOs are of companies going through a transitory growth period and are therefore subject to additional uncertainty regarding their future value.

Initial Public Offerings (IPO)

IPO stands for initial public offering and occurs when a company first sells its shares to the public. You can find more information about IPOs, particularly why investors have difficulty getting shares in an IPO, the pricing differences between the IPO and secondary market trading, and a brokerage firm’s IPO eligibility requirements.

IPO Basics: What is an IPO?


Selling Stock
IPO is an acronym for Initial Public Offering. This is the first sale of stock by a company to the public. A company can raise money by issuing either debt (bonds) or equity. If the company has never issued equity to the public, it's known as an IPO.

Companies fall into two broad categories: private and public.

A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents, and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza, and Hallmark Cards are all privately held?

It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public."

Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the SEC. In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock.

Why Go Public?
Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:

• Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
• As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
• Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.

Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed.

The Internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their business. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. In VC talk, this is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning.

How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money. In our opinion, IPOs like this are extremely risky and should be avoided.

IPO Basics: Tracking Stocks

Tracking stocks appear when a large company spins off one of its divisions into a separate entity. The rationale behind the creation of tracking stocks is that individual divisions of a company will be worth more separately than as part of the company as a whole.

From the company's perspective, there are many advantages to issuing a tracking stock. The company gets to retain control over the subsidiary but all revenues and expenses of the division are separated from the parent company's financial statements and attributed to the tracking stock. This is often done to separate a high growth division with large losses from the financial statements of the parent company. Most importantly, if the tracking stock rockets up, the parent company can make acquisitions with stock of the subsidiary instead of cash.

While a tracking stock may be spun off in an IPO, it's not the same as the IPO of a private company going public. This is because tracking stock usually has no voting rights, and often there is no separate board of directors looking after the rights of the tracking stock. It's like you're a second class shareholder! This doesn't mean that a tracking stock can't be a good investment. Just keep in mind that a tracking stock isn't a normal IPO.

IPO Basics: Conclusion and Resources

Let's review the basics of an IPO:

• An IPO is the first sale of stock by a company to the public.
• Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership.
• Going public raises cash and provides many benefits for a company.
• The dot-com boom lowered the bar for companies to do an IPO. Many startups went public without any profits and little more than a business plan.
• Getting in on a hot IPO is very difficult, if not impossible.
• The process of underwriting involves raising money from investors by issuing new securities.
• Companies hire investment banks to underwrite an IPO.
• The road to an IPO consists mainly of putting together the formal documents for the SEC and selling the issue to institutional clients.
• The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.
• An IPO company is difficult to analyze since there isn't a lot of historical info.
• Lockup periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock.
• Flipping may get you blacklisted from future offerings.
• Road shows and red herrings are marketing events meant to get as much attention as possible. Don't get sucked in by the hype.
• A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.
• Don't consider tracking stocks to be the same as a normal IPO, as you are essentially a second-class shareholder