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An initial public offering (IPO) or stock launch is a
public offering A public offering is the offering of securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people comm ...
in which shares of a company are sold to
institutional investor An institutional investor is an entity which pools money to purchase , , and other investment assets or originate loans. Institutional investors include s, s, s, , , s, s, , s, s, , , and s. Operating companies which invest excess capital in the ...
s and usually also retail (individual) investors. An IPO is typically
underwritten Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability ...
by one or more
investment banks An investment bank is a financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit ...
, who also arrange for the shares to be listed on one or more
stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green To ...
s. Through this process, colloquially known as ''floating'', or ''going public'', a privately held company is transformed into a
public company A public company, publicly traded company, publicly held company, publicly listed company, or public limited company is a whose ownership is organized via shares of which are intended to be freely traded on a or in markets. A public company ...
. Initial public offerings can be used to raise new equity capital for companies, to
monetize Monetization ( also spelled monetisation) is broadly speaking, the process of converting something into money. The term has a broad range of uses. In banking, the term refers to the process of converting or establishing something into legal te ...
the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded. After the IPO, shares are traded freely in the open market at what is known as the free float. Stock exchanges stipulate a minimum free float both in absolute terms (the total value as determined by the share price multiplied by the number of shares sold to the public) and as a proportion of the total share capital (i.e., the number of shares sold to the public divided by the total shares outstanding). Although IPO offers many benefits, there are also significant costs involved, chiefly those associated with the process such as banking and legal fees, and the ongoing requirement to disclose important and sometimes sensitive information. Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a
prospectus Prospectus may refer to: * Prospectus (finance), also called a ''concept note'' * Prospectus (university) * Prospectus (book) * Prospectus (album), ''Prospectus'' (album), a 1983 album by saxophonist Steve Lacy * Parkland College's newspaper {{dis ...
. Most companies undertake an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter. Underwriters provide several services, including help with correctly assessing the value of shares (share price) and establishing a public market for shares (initial sale). Alternative methods such as the
Dutch auction A Dutch auction is one of several similar Auctions#Types, types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high asking price in the case of selling, and lowers it until some p ...
have also been explored and applied for several IPOs.


History

The earliest form of a company which issued ''public shares'' was the case of the ''publicani'' during the
Roman Republic The Roman Republic ( la, Rēs pūblica Rōmāna ) was a state of the classical Roman civilization, run through public In public relations Public relations (PR) is the practice of managing and disseminating information from an indiv ...
. Like modern joint-stock companies, the ''publicani'' were legal bodies independent of their members whose ownership was divided into shares, or ''partes''. There is evidence that these shares were sold to public investors and traded in a type of
over-the-counter Over-the-counter (OTC) drugs are medicine Medicine is the Art (skill), art, science, and Praxis (process) , practice of caring for a patient and managing the diagnosis, prognosis, Preventive medicine, prevention, therapy, treatment or Palliat ...
market in the
Forum Forum (plural forums or fora) may refer to: Common uses * Forum (legal), designated space for public expression in the United States *Forum (Roman), open public space within a Roman city **Roman Forum, most famous example *Internet forum, discus ...

Forum
, near the
Temple of Castor and Pollux The Temple of Castor and Pollux ( it, Tempio dei Dioscuri) is an ancient temple in the Roman Forum The Roman Forum, also known by its Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of th ...

Temple of Castor and Pollux
. The shares fluctuated in value, encouraging the activity of speculators, or ''quaestors''. Mere evidence remains of the prices for which ''partes'' were sold, the nature of initial public offerings, or a description of stock market behavior. ''Publicani'' lost favor with the fall of the Republic and the rise of the Empire. In the early modern period, the Dutch were financial innovators who helped lay the foundations of modern financial systems. The first modern IPO occurred in March 1602 when the
Dutch East India Company The Dutch East India Company, officially the United East India Company ( nl, Vereenigde Oost Indische Compagnie; VOC), was a multinational corporation A multinational company (MNC) is a corporate A corporation is an organization—u ...

Dutch East India Company
offered shares of the company to the public to raise capital. The Dutch East India Company (VOC) became the first company in history to issue bonds and
shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known ...
of
stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...

stock
to the general public. In other words, the VOC was officially the first
publicly traded company A public company, publicly traded company, publicly held company, publicly listed company, or public limited company A public limited company (legally abbreviated to PLC or plc) is a type of public company under United Kingdom company law, som ...
, because it was the first company to be ever actually
listed Listed may refer to: * Listed, Bornholm, a fishing village on the Danish island of Bornholm * Listed (MMM program), a television show on MuchMoreMusic * Endangered species in biology * Listed building, in architecture, designation of a historically ...
on an official
stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green To ...
. While the Italian city-states produced the first transferable government bonds, they did not develop the other ingredient necessary to produce a fully-fledged
capital market 200px, The trading floor of the New York Stock Exchange, one of the largest secondary capital markets in the world. Most of the trades on the New York Stock Exchange are executed electronically, but its hybrid structure allows some trading to be ...
: corporate shareholders. As
Edward Stringham Edward Peter Stringham (born January 18, 1975) is an Austrian School The Austrian School is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that is based on methodological individualism—the concept th ...
(2015) notes, "companies with transferable shares date back to classical Rome, but these were usually not enduring endeavors and no considerable
secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial market A financial market is a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public ...
existed (Neal, 1997, p. 61)." In the United States, the first IPO was the public offering of
Bank of North America The Bank of North America was the first chartered bank in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in Nort ...

Bank of North America
around 1783.


Advantages and disadvantages


Advantages

When a company lists its securities on a public exchange, the money paid by the investing public for the newly issued shares goes directly to the company (primary offering) as well as to any early private investors who opt to sell all or a portion of their holdings (secondary offerings) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of the debt, or working capital. A company selling common shares is never required to repay the capital to its public investors. Those investors must endure the unpredictable nature of the open market to price and trade their shares. After the IPO, when shares are traded in the market, money passes between public investors. For early private investors who choose to sell shares as part of the IPO process, the IPO represents an opportunity to
monetize Monetization ( also spelled monetisation) is broadly speaking, the process of converting something into money. The term has a broad range of uses. In banking, the term refers to the process of converting or establishing something into legal te ...
their investment. After the IPO, once shares are traded in the open market, investors holding large blocks of shares can either sell those shares piecemeal in the open market or sell a large block of shares directly to the public, at a
fixed price A fixed price is a price set for a good 175px, In many religions, angels are considered to be good beings. In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Go ...
, through a
secondary market offeringA secondary market offering, according to the U.S. Financial Industry Regulatory Authority The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) which financial regul ...
. This type of offering is not dilutive since no new shares are being created. Stock prices can change dramatically during a company's first days in the public market. Once a company is listed, it is able to issue additional common shares in a number of different ways, one of which is the
follow-on offering A follow-on offering, also known as a follow-on public offering (FPO), is a type of public offering A public offering is the offering of securities of a company or a similar corporation to the public. Generally, the securities are to be listed on a ...
. This method provides capital for various corporate purposes through the issuance of equity (see
stock dilution In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities in ...
) without incurring any debt. This ability to quickly raise potentially large amounts of capital from the marketplace is a key reason many companies seek to go public. An IPO accords several benefits to the previously private company: *Enlarging and diversifying equity base *Enabling cheaper access to capital *Increasing exposure, prestige, and public image *Attracting and retaining better management and employees through liquid equity participation *Facilitating acquisitions (potentially in return for shares of stock) *Creating multiple financing opportunities: equity,
convertible debt In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availabl ...
, cheaper bank loans, etc.


Disadvantages

There are several disadvantages to completing an initial public offering: *Significant legal, accounting, and marketing costs, many of which are ongoing *Requirement to disclose financial and business information *Meaningful time, effort, and attention required of management *Risk that required funding will not be raised *Public dissemination of information that may be useful to competitors, suppliers and customers. *Loss of control and stronger agency problems due to new shareholders *Increased risk of litigation, including private securities class actions and shareholder derivative actions


Time Taken To Complete The IPO Process

The time it takes for a company to go public is never the same. It depends on the company's size and how they choose to go public. Various choices are available at various phases of the IPO process. As a result, all of these factors will influence the length of time it takes to execute the IPO. In most cases,  the minimum time that will be required will be six months.  The initial public offering (IPO) process will take at least six months to complete. However, the maximum period of time can range from 9 months to a year. So, on average, it takes six months to a year to finish the entire process of going public.


Procedure

IPO procedures are governed by different laws in different countries. In the United States, IPOs are regulated by the
United States Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agencies of the United States government, independent agency of the United States federal government that was created following the Great Depression, stock market crash in ...

United States Securities and Exchange Commission
under the
Securities Act of 1933 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress The United States Congress is the legislature ...
. In the United Kingdom, the UK Listing Authority reviews and approves prospectuses and operates the listing regime.


Advance planning

Planning is crucial to a successful IPO. One book suggests the following seven advance planning steps: # develop impressive management and professional team # grow the company's business with an eye to the public marketplace # obtain audited financial statements using IPO-accepted accounting principles # clean up the company's act # establish antitakeover defenses # develop good corporate governance # create insider bail-out opportunities and take advantage of IPO windows.


Retention of underwriters

IPOs generally involve one or more
investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study of financial institution ...
s known as "
underwriter Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability ...
s". The company offering its shares, called the "issuer", enters into a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell those shares. A large IPO is usually underwritten by a "
syndicate A syndicate is a self-organizing group of individuals, companies, corporations or entities formed to transact some specific business, to pursue or promote a shared interest. Etymology The word ''syndicate'' comes from the French word ''syndicat ...
" of investment banks, the largest of which take the position of "lead underwriter". Upon selling the shares, the underwriters retain a portion of the proceeds as their fee. This fee is called an
underwriting spread The underwriting spread is the difference between the amount paid by the underwriting Underwriting (UW) services are provided by some large financial institution Financial institutions, otherwise known as banking institutions, are corporation ...
. The spread is calculated as a discount from the price of the shares sold (called the gross spread). Components of an underwriting spread in an initial public offering (IPO) typically include the following (on a per-share basis): Manager's fee, Underwriting fee—earned by members of the syndicate, and the Concession—earned by the broker-dealer selling the shares. The Manager would be entitled to the entire underwriting spread. A member of the syndicate is entitled to the underwriting fee and the concession. A broker-dealer who is not a member of the syndicate but sells shares would receive only the concession, while the member of the syndicate who provided the shares to that broker-dealer would retain the underwriting fee. Usually, the managing/lead underwriter, also known as the
bookrunnerIn investment banking, a bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in Stock, equity, debt, or hybrid security, hybrid securities issuances. The bookrunner usually Syndicate, syndicates with other investment banks ...
, typically the underwriter selling the largest proportions of the IPO, takes the highest portion of the gross spread, up to 8% in some cases. Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the major selling syndicate in its domestic market, Europe, in addition to separate group corporations or selling them for US/Canada and Asia. Usually, the lead underwriter in the head selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements and because it is an expensive process, IPOs also typically involve one or more
law firm A law firm is a business entity formed by one or more lawyers A lawyer or attorney is a person who practices law, as an advocate, attorney at lawAttorney at law or attorney-at-law, usually abbreviated in everyday speech to attorney, is the ...
s with major practices in
securities law Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument Finance ...
, such as the
Magic Circle A magic circle is a circle of space marked out by practitioners of some branches of ritual magic, which they generally believe will contain energy and form a sacred space, or will provide them a form of magical protection, or both. It may be marke ...
firms of London and the
white-shoe firmA white-shoe firm is a leading professional services Professional services are occupations in the service sector requiring special training in the arts The arts refers to the theory, human application and physical expression of creativit ...
s of New York City. Financial historians
Richard Sylla Richard Eugene Sylla (born ) is the chairman of the board of trustees of the Museum of American Finance The Museum of American Finance is the United States's only independent public museum dedicated to preserving, exhibiting and teaching about ...
and Robert E. Wright have shown that before 1860 most early U.S. corporations sold shares in themselves directly to the public without the aid of intermediaries like investment banks. The
direct public offering A direct public offering (DPO) or direct listing is a method by which a company can offer an investment opportunity directly to the public. Description A DPO is similar to an initial public offering (IPO) in that securities, such as stock or debt, ...
(DPO), as they term it, was not done by auction but rather at a share price set by the issuing corporation. In this sense, it is the same as the fixed price public offers that were the traditional IPO method in most non-US countries in the early 1990s. The DPO eliminated the agency problem associated with offerings intermediated by investment banks.


Allocation and pricing

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include: * Best efforts contract * Firm commitment contract * All-or-none contract * Bought deal Public offerings are sold to both institutional investors and retail clients of the underwriters. A licensed securities salesperson ( Registered Representative in the US and Canada) selling shares of a public offering to his clients is paid a portion of the selling concession (the fee paid by the issuer to the underwriter) rather than by his client. In some situations, when the IPO is not a "hot" issue (undersubscribed), and where the salesperson is the client's advisor, it is possible that the financial incentives of the advisor and client may not be aligned. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under a specific circumstance known as the
greenshoe An "over-allotment option", or sometimes a greenshoe is the term commonly used to describe a special arrangement in a share offering, for example an Initial public offering, initial public offering (IPO), which enables the investment bank represent ...

greenshoe
or overallotment option. This option is always exercised when the offering is considered a "hot" issue, by virtue of being oversubscribed. In the US, clients are given a preliminary prospectus, known as a red herring prospectus, during the initial quiet period. The red herring prospectus is so named because of a bold red warning statement printed on its front cover. The warning states that the offering information is incomplete, and may be changed. The actual wording can vary, although most roughly follow the format exhibited on the Facebook IPO red herring. During the quiet period, the shares cannot be offered for sale. Brokers can, however, take indications of interest from their clients. At the time of the stock launch, after the Registration Statement has become effective, indications of interest can be converted to buy orders, at the discretion of the buyer. Sales can only be made through a final prospectus cleared by the Securities and Exchange Commission. The final step in preparing and filing the final IPO prospectus is for the issuer to retain one of the major financial "printers", who print (and today, also electronically file with the SEC) the registration statement on Form S-1. Typically, preparation of the final prospectus is actually performed at the printer, wherein one of their multiple conference rooms the issuer, issuer's counsel (attorneys), underwriter's counsel (attorneys), the lead underwriter(s), and the issuer's accountants/auditors make final edits and proofreading, concluding with the filing of the final prospectus by the financial printer with the Securities and Exchange Commission. Before legal actions initiated by New York Attorney General
Eliot Spitzer Eliot Laurence Spitzer (born June 10, 1959) is an American politician, attorney, educator and real estate developer. A member of the Democratic PartyDemocratic Party most often refers to: *Democratic Party (United States) Democratic Party and ...

Eliot Spitzer
, which later became known as the Global Settlement enforcement agreement, some large
investment firms An investment bank is a financial services company or Corporate structure, corporate division that engages in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate fin ...
had initiated favorable research coverage of companies in an effort to aid
corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers a ...
departments and retail divisions engaged in the marketing of new issues. The central issue in that enforcement agreement had been judged in court previously. It involved the conflict of interest between the
investment banking An investment bank is a financial services Financial services are the economic services provided by the finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is conce ...
and
analysis Analysis is the process of breaking a complex topic or substance Substance may refer to: * Substance (Jainism), a term in Jain ontology to denote the base or owner of attributes * Chemical substance, a material with a definite chemical composit ...
departments of ten of the largest investment firms in the United States. The investment firms involved in the settlement had all engaged in actions and practices that had allowed the inappropriate influence of their research analysts by their investment bankers seeking lucrative fees. A typical violation addressed by the settlement was the case of CSFB and
Salomon Smith Barney Salomon Brothers, Inc., was an American multinational bulge bracket investment bank To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III a ...
, which were alleged to have engaged in the inappropriate spinning of "hot" IPOs and issued fraudulent research reports in violation of various sections within the
Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities (stock Stock (also capital stock) is all of the shares into which ow ...
.


Pricing

A company planning an IPO typically appoints a lead manager, known as a
bookrunnerIn investment banking, a bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in Stock, equity, debt, or hybrid security, hybrid securities issuances. The bookrunner usually Syndicate, syndicates with other investment banks ...
, to help it arrive at an appropriate price at which the shares should be issued. There are two primary ways in which the price of an IPO can be determined. Either the company, with the help of its lead managers, fixes a price ("fixed price method"), or the price can be determined through analysis of confidential investor demand data compiled by the bookrunner ("
book building Book building is a systematic process of generating, capturing, and recording investor demand for shares. Usually, the issuer appoints a major investment bank To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James ...
"). Historically, many IPOs have been underpriced. The effect of underpricing an IPO is to generate additional interest in the stock when it first becomes publicly traded.
Flipping Flipping is a term used primarily in the United States to describe purchasing a revenue-generating asset and quickly reselling (or "flipping") it for profit. The term "house flipping" is used by real estate investors to describe the process of b ...
, or quickly selling shares for a
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic en ...
, can lead to significant gains for investors who were allocated shares of the IPO at the offering price. However, underpricing an IPO results in lost potential capital for the issuer. One extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 1990s internet era. Underwritten by
Bear Stearns The Bear Stearns Companies, Inc. was a New York-based global investment bank, security (finance), securities trading and brokerage firm that failed in 2008 as part of the Great Recession, global financial crisis and recession, and was subsequentl ...

Bear Stearns
on 13 November 1998, the IPO was priced at $9 per share. The share price quickly increased 1,000% on the opening day of trading, to a high of $97. Selling pressure from institutional flipping eventually drove the stock back down, and it closed the day at $63. Although the company did raise about $30  billion from the offering, it is estimated that with the level of demand for the offering and the volume of trading that took place they might have left upwards of $200 million on the table. The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of trading. If so, the stock may lose its marketability and hence even more of its value. This could result in losses for investors, many of whom being the most favored clients of the underwriters. Perhaps the best-known example of this is the Facebook IPO in 2012. Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock but high enough to raise an adequate amount of capital for the company. When pricing an IPO, underwriters use a variety of key performance indicators and non-GAAP measures. The process of determining an optimal price usually involves the
underwriters Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...
("syndicate") arranging share purchase commitments from leading institutional investors. Some researchers (Friesen & Swift, 2009) believe that the underpricing of IPOs is less a deliberate act on the part of issuers and/or underwriters, and more the result of an over-reaction on the part of investors (Friesen & Swift, 2009). One potential method for determining to underprice is through the use of IPO underpricing algorithms.


Dutch auction

A
Dutch auction A Dutch auction is one of several similar Auctions#Types, types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high asking price in the case of selling, and lowers it until some p ...
allows shares of an initial public offering to be allocated based only on price aggressiveness, with all successful bidders paying the same price per share. One version of the Dutch auction is OpenIPO, which is based on an auction system designed by economist
William Vickrey William is a male Male (♂) is the sex of an organism that produces the gamete known as sperm. A male gamete can fuse with a larger female gamete, or ovum, in the process of fertilization. A male cannot sexual reproduction, reproduce sexually ...
. This auction method ranks bids from highest to lowest, then accepts the highest bids that allow all shares to be sold, with all winning bidders paying the same price. It is similar to the model used to auction
Treasury bills United States Treasury securities are government debt Government debt, also known as public interest, public debt, national debt and sovereign debt, is the total amount of debt owed at a point in time by a government or state to lenders. Govern ...
, notes, and bonds since the 1990s. Before this, Treasury bills were auctioned through a discriminatory or pay-what-you-bid auction, in which the various winning bidders each paid the price (or yield) they bid, and thus the various winning bidders did not all pay the same price. Both discriminatory and uniform price or "Dutch" auctions have been used for IPOs in many countries, although only uniform price auctions have been used so far in the US. Large IPO auctions include Japan Tobacco, Singapore Telecom, BAA Plc and Google (ordered by size of proceeds). A variation of the Dutch auction has been used to take a number of U.S. companies public including Morningstar, Interactive Brokers Group,
Overstock.com Overstock.com, Inc. is an American internet retailer selling primarily furniture headquartered in Midvale, Utah, near Salt Lake City Salt Lake City (often shortened to Salt Lake and abbreviated as SLC) is the Capital (political), capital an ...
, Ravenswood Winery, Clean Energy Fuels, and
Boston Beer Company The Boston Beer Company is a brewer founded in 1984. Boston Beer Company's first brand of beer was named Samuel Adams after Founding Father The following list of national founding figures is a record, by country, of people who were credit ...

Boston Beer Company
. In 2004, Google used the Dutch auction system for its initial public offering. Traditional U.S. investment banks have shown resistance to the idea of using an auction process to engage in public securities offerings. The auction method allows for equal access to the allocation of shares and eliminates the favorable treatment accorded important clients by the underwriters in conventional IPOs. In the face of this resistance, the Dutch auction is still a little used method in U.S. public offerings, although there have been hundreds of auction IPOs in other countries. In determining the success or failure of a Dutch auction, one must consider competing objectives. If the objective is to reduce risk, a traditional IPO may be more effective because the underwriter manages the process, rather than leaving the outcome in part to random chance in terms of who chooses to bid or what strategy each bidder chooses to follow. From the viewpoint of the investor, the Dutch auction allows everyone equal access. Moreover, some forms of the Dutch auction allow the underwriter to be more active in coordinating bids and even communicating general auction trends to some bidders during the bidding period. Some have also argued that a uniform price auction is more effective at
price discovery The price discovery process (also called price discovery mechanism) is the process of determining the price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for one unit o ...
, although the theory behind this is based on the assumption of independent private values (that the value of IPO shares to each bidder is entirely independent of their value to others, even though the shares will shortly be traded on the aftermarket). Theory that incorporates assumptions more appropriate to IPOs does not find that sealed bid auctions are an effective form of price discovery, although possibly some modified form of auction might give a better result. In addition to the extensive international evidence that auctions have not been popular for IPOs, there is no U.S. evidence to indicate that the Dutch auction fares any better than the traditional IPO in an unwelcoming market environment. A Dutch auction IPO by WhiteGlove Health, Inc., announced in May 2011 was postponed in September of that year, after several failed attempts to price. An article in the ''
Wall Street Journal ''The Wall Street Journal'', also known as ''The Journal'', is an American business-focused, English-language international daily newspaper A newspaper is a periodical Periodical literature (also called a periodical publication or simpl ...

Wall Street Journal
'' cited the reasons as "broader stock-market volatility and uncertainty about the global economy have made investors wary of investing in new stocks".


Quiet period

Under American securities law, there are two-time windows commonly referred to as "quiet periods" during an IPO's history. The first and the one linked above is the period of time following the filing of the company's S-1 but before SEC staff declare the registration statement effective. During this time, issuers, company insiders, analysts, and other parties are legally restricted in their ability to discuss or promote the upcoming IPO (U.S. Securities and Exchange Commission, 2005). The other "quiet period" refers to a period of 10 calendar days following an IPO's first day of public trading. During this time, insiders and any underwriters involved in the IPO are restricted from issuing any earnings forecasts or research reports for the company. When the quiet period is over, generally the underwriters will initiate research coverage on the firm. A three-day waiting period exists for any member that has acted as a manager or co-manager in a secondary offering.


Delivery of shares

Not all IPOs are eligible for delivery settlement through the DTC system, which would then either require the physical delivery of the
stock certificate In corporate law Corporate law (also known as business law or enterprise law or sometimes company law) is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refe ...

stock certificate
s to the clearing agent bank's custodian or a
delivery versus paymentDelivery versus payment or DvP is a common form of settlement for securities. The process involves the simultaneous delivery of all documents necessary to give effect to a transfer of securities in exchange for the receipt of the stipulated payment ...
(DVP) arrangement with the selling group brokerage firm.


Stag profit (flipping)

"Stag profit" is a situation in the stock market before and immediately after a company's initial public offering (or any new issue of shares). A "stag" is a party or individual who subscribes to the new issue expecting the price of the stock to rise immediately upon the start of trading. Thus, stag
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic en ...
is the financial gain accumulated by the party or individual resulting from the value of the shares rising. This term is more popular in the United Kingdom than in the United States. In the US, such investors are usually called flippers, because they get shares in the offering and then immediately turn around "
flipping Flipping is a term used primarily in the United States to describe purchasing a revenue-generating asset and quickly reselling (or "flipping") it for profit. The term "house flipping" is used by real estate investors to describe the process of b ...
" or selling them on the first day of trading.


Largest IPOs


Largest IPO markets

Prior to 2009, the United States was the leading issuer of IPOs in terms of total value. Since that time, however, China (
Shanghai Shanghai (, , Standard Chinese, Standard Mandarin pronunciation: ) is one of the four Direct-administered municipalities of China, direct-administered municipalities of the China, People's Republic of China. The city is located on the sou ...
,
Shenzhen Shenzhen (; ; ), also known as Sham Chun, is a major sub-provincial A sub-provincial division () (or deputy-provincial divisions) in China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the Lis ...

Shenzhen
and
Hong Kong Hong Kong (; , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (HKSAR), is a city A city is a large human settlement.Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Pe ...
) has been the leading issuer, raising $73 billion (almost double the amount of money raised on the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an U ...

New York Stock Exchange
and
NASDAQ The Nasdaq Stock Market () is an American stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorpora ...
combined) up to the end of November 2011.


See also

* Alternative public offering *
Direct public offering A direct public offering (DPO) or direct listing is a method by which a company can offer an investment opportunity directly to the public. Description A DPO is similar to an initial public offering (IPO) in that securities, such as stock or debt, ...
*
Public offering without listingA public offering without listing, often called a POWL deal or a POWL, is a form of public equity offering by non-Japanese firms in the Japanese market, without the previously required simultaneous listing on a local exchange (e.g. TSE). History ...
* Reverse IPO * Smaller reporting company *
Venture capital Venture capital (VC) is a form of private equity Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded. Private equity is a ty ...


References


Further reading

* * * * * * * * * * *Mondo Visione web site
Chambers, Clem. "Who needs stock exchanges?"
''Exchanges Handbook''. Published 2006-07-14. Accessed 21 September 2011 * * *Hu, Bei and Vannucci, Cecile

Published 2010-10-29. Retrieved 2011-09-21 * Published 2006-09-29. Accessed 2011-09-21 *


External links


Nasdaq database of all U.S. Initial Public Offerings beginning Jan. 1997
{{DEFAULTSORT:Initial Public Offering Stock market terminology