1. Initial Public Offering
2. Importance of Public Offerings
3. Preparing an Initial Public Offering
4. A Lead Underwriter's Duties
5. Presenting an Initial Public Offering
6. Finalizing an Initial Public Offer
7. Lockup Period

What are public offerings of stock? Corporations usually offer their stocks to the public to raise capital on the stock market. People who buy the stocks become owners of the company.

Initial Public Offering

An initial public offering (IPO) is the process through which a corporation's owners sell its stock to the investing public. For example, the owners of a GregTech Corporation intend to sell one-fourth of their ownership interest in the company. To find a market, they offer the shares to the public. However, the company must hire an underwriter to establish the shares' value and draft a memorandum detailing important information about the corporation to the buying public. After that, the underwriter offers the shares to the public through the stock market.

Importance of Public Offerings

Companies use public offerings to raise capital, a vital resource for growth and expansion. A public offering is called an initial public offering if it is the first time the company is conducting the exercise. However, public offerings are not restricted to company shares, as bonds and other types of securities can be sold through public offerings.

Preparing an Initial Public Offering

Companies usually spend several years and huge amounts of money to prepare for their IPO. The company needs an experienced management team and board of directors that understand the process of taking companies public. The corporation must also have an efficient accounting and financial reporting system.

A firm that wants to carry out an IPO must have excellent growth potential and at least $100 million in annual revenue. It must hire advisors such as:

  • Attorneys.
  • An investor relations or a public relations company.
  • A financial printer.

The company also needs underwriters or investment banks that will handle the process as well as a group of financial services companies to help the company sell the shares to the public.

A Lead Underwriter's Duties

The lead underwriter's duties during an IPO might include:

  • Creating a timeline for the IPO.
  • Ensuring due diligence.
  • Preparing a registration statement that will provide important information about the offering to the investing public.
  • Creating the pitch deck.
  • Identifying potential investors.
  • Identifying the appropriate market on which to list the IPO (such as the New York Stock Exchange [NYSE] or the NASDAQ).

Presenting an Initial Public Offering

Once the underwriter submits the registration statement to the Securities and Exchange Commission (SEC), the company usually makes several amendments. When the SEC approves the statement, the corporation starts marketing the offering through a roadshow. The senior management team will make presentations in major U.S. cities and sometimes in Europe and Asia.

The underwriter uses the roadshow to measure investor interest in the IPO. After assessing investor interest, the company can determine the number of shares to issue and their value. If the valuation of the shares increases during the roadshow, it means the deal is attracting investors' attention.

Finalizing an Initial Public Offer

After completing the roadshow, the firm will determine the transaction's valuation. The pricing will be finalized at a generally tense meeting held the evening before launching the IPO. The tension is usually due to the company's senior managers' desire to get a high price and the investment bankers' insistence on a fair price that will offer value to investors. The senior managers will be extremely busy on the day of the IPO. They might give multiple media interviews and open or close the markets with the symbolic ringing of the bell on the NYSE.

However, the IPO is merely the beginning of a long process. Next, the company must:

  • Implement its business plan.
  • Fight off competition.
  • Continue to maintain its growth.

Public corporations need a strong management team to keep delivering at such a high level.

Lockup Period

During an IPO, individuals who owned shares in the company when it was private will not be allowed to sell their shares for 90 to 180 days, or a lockup period. Each company's lockup period is the length of time the stakeholders agreed upon during the distribution of shares before the IPO. The lockup period's purpose is to prevent insider trading from crashing the stock price. The price will begin to drop once the insiders and large investors start unloading their shares after that period.

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