This week Michele Borucki walks us through the sometimes-confusing world of initial public offerings, or IPOs. How do they happen? What are the steps that companies have to take, and why do they take them? What resources can we use to find out more? Michele explains all! ~Helen
In the prospect research world, we know a lot about the stock market, probably more than any of us liberal arts majors ever anticipated we would need (or want) to know. Fairly early on in our careers we learn to search EDGAR, paid resources, and even company websites for financial filings (though it may take a few years to completely understand which filing is which, and what the heck are those footnotes actually telling us??)
It can take hours of digging at times, through hundreds of different forms to find what we are looking for, but there at the very beginning is the one form unlike all of the others: the form S-1. The S-1, or “red herring”, is the start of it all for a public company, it’s the initial form filed with the SEC right before an initial public offering, or IPO.
So, why do companies even decide to go public? Well, it’s essentially a fundraising method used by companies. They are able to sell deeply discounted shares to investors, then those shares are traded on a stock exchange at a (generally) higher value. The main motivation to pursue an IPO is that these companies can raise capital from the sale of shares to the public and provide liquidity to company founders and early investors and take advantage of a higher valuation.
There are many steps companies have to take to see their name on an exchange and it can take anywhere from six months up to a year. The process looks a little something like this:
- Proposal – Underwriters present proposals and valuations, best type of security to offer, offering price, number of shares, and estimated time frame for market offering.
- Underwriting – The company chooses an underwriter, (a financial institution that will buy the shares and then sell them on the open market), formally agrees to terms, and signs an agreement with their chosen underwriter.
- Team – IPO teams are formed (underwriters, lawyers, CPAs, and SEC experts).
- Documentation – Information about the company is put together for the S-1. The S-1 has two parts, the prospectus and the privately held filing information.
- Marketing and updates – Materials are created for pre-marketing of new stock issuance. The team markets the share issuance to estimate the demand and establish a final offering price. Underwriters can make changes to their financial analysis throughout the marketing process which can include changing the IPO price or issuance date.
- Board and Processes – A board of directors is formed to ensure processes for reporting auditable financial and accounting information every quarter.
- Shares Issued – The company issues its shares on an IPO date.
- Post-IPO – Some post-IPO provisions may be instituted. Underwriters may have a specified time frame to buy an additional number of shares after the IPO date. Meanwhile, certain investors may be subject to what are called “quiet periods”. The purpose of the quiet period is to preserve objectivity and avoid the appearance of a company providing insider information to select investors. With an IPO, the quiet period stretches from when a company files registration paperwork with U.S. regulators through the 40 days after the stock starts trading.
There are a lot of pros to companies going public. Of course, the capital raised! They usually get great publicity. Companies can attract better management and skilled employees, have an increase in market share, an increase in transparency, and it’s a great exit strategy for founders.
But there are also some downsides to going public. It’s incredibly expensive. While the financial reporting can be a pro for transparency’s sake, it can also be a con in that not only will board members be held to rigorous standards, but periodic audits are required and public reporting can bring on scrutiny from shareholders, which sometimes results in lawsuits.
There are also distractions caused by the IPO process. If the leaders of a company are focused on going public and wrapped up in that process, they may miss opportunities to enhance a product or overlook an up-and-coming competitor. Lastly, there is investor appetite. Not all companies have a large following, so boards have to decide whether or not there will be enough interest in an IPO to make the shift worthwhile.
Proactive research when it comes to our prospects or donors who are involved in an IPO can be really fun! There are some pretty great resources out there to track upcoming IPO’s:
- Exchange websites – The New York Stock Exchange (NYSE) and NASDAQ both maintain dedicated sections for IPOs. NASDAQ has a dedicated section called “Upcoming IPO” and NYSE maintains an “IPO Center” section. Exchange websites will also provide access to the official IPO prospectuses.
- Google News – Single source for all global IPOs, regardless of the exchange or country where an IPO is listed.
- Yahoo! Finance – Has a dedicated IPO section with details on the IPO date, symbol, price, and links to IPO profiles and news items. It also offers performance tracking of past IPOs.
- IPO Monitor – Dedicated website that provides specific news for tracking IPOs. Apart from the usual IPO information, it also provides broader market-level statistics under the section called “Current IPO Market Dashboard.”
- IPO Scoop – Offers information related to upcoming IPOs. Paid subscribers also get access to SCOOP’s ratings for upcoming IPOs.
- Renaissance Capital IPO Center – Maintains a dedicated IPO section that has a weekly calendar for IPO offerings. It also offers other related content such as articles about the largest U.S. IPOs and the largest global IPOs, in addition to dedicated sections like “IPO News” and “IPO Poll.”
- And Fidelity has an excellent glossary of IPO terms!