Initial Public Offering Services
Companies seeking to raise funds by offering shares to the public must adhere to strict exchange listing requirements as well as Securities and Exchange Commission (SEC) regulations. They must also develop a board and processes for regularly reporting auditable financial and accounting documents to regulators. An external legal team is often needed to vet the plan to ensure it meets regulatory requirements. Companies then engage investment banks that will serve as underwriters, the entities that sell the initial block of shares for a commission. These underwriters will create marketing materials and market the IPO to gauge investor demand.
The underwriters must carefully assess the share price and determine if it is at or above the company’s intrinsic value. This process involves conducting a due diligence of the company, its management, and its business model. They will then make multiple filings with the SEC and prepare a prospectus for prospective investors. The prospectus explains the business model, risk factors, dilution, and financial condition of the company. This is a critical stage because it sets the tone for investor perception of the company’s value and enables key analysis metrics, such as price/earnings ratios, to be applied to determine whether the IPO is under or overpriced.
As the IPO is marketed, the underwriters will also determine how many shares will be offered for sale and at what price. This is based on their evaluation of the potential interest of investors and can be adjusted after receiving feedback from those who have indicated that they wish to buy shares. The underwriters may also set a minimum number of shares to be sold in order to limit the amount of volatility in the first few days after trading begins.
Investors build interest in the IPO by following developing headlines and other information that can help to inform their assessment of the best pricing. This can result in a volatile market as investors jockey to get the first trades, sometimes resulting in IPO “flipping,” where an investor will purchase and immediately resell a newly issued share for a profit.
The issuance of an IPO requires extensive legal work, so companies usually employ one or more law firms with significant expertise in the area. These may be major international firms with offices around the world or smaller boutiques that specialize in IPOs. The process is also time consuming and can be expensive.
During the IPO process, companies are required to submit financial and other disclosures to the SEC and their home country’s securities authority. These submissions are often referred to as “10-K” and 10-Q filings, respectively, and are required by regulators for transparency. These filings must be updated as the business changes. In addition, a company must maintain internal procedures to manage its finances and report quarterly earnings to its board of directors. Companies that prefer to avoid the costly process of an IPO can pursue a direct listing with the exchange, but this is more risky and less common. initial public offering services