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Initial public offering

From Wikipedia, the free encyclopedia

Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors[1] and usually also retail (individual) investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used: to raise new equity capital for the company concerned; to monetize 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 enterprises.

After the IPO, shares traded freely in the open market are 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. 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 have also been explored and applied for several IPOs.

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In the last offer-- in the last video, not the last offering. I guess it was a bit of both. We had completed our Series B. We had gone back to the till. Got another round of venture capital funding. And we raised $10 million more that's going to help us build out the website and do some marketing, and hire up some more engineers and other employees. And to do that we had to sell one million shares. We essentially sold them at $10 a share. And so after that offering, well, our pre-money valuation was $30 million and our post-money is now $40 million. That's the value of our assets as-- I mean, the website, that's kind of an arbitrary valuation. And I've gotten a letter asking, well, how do you value that? And that's a whole subject for another playlist. And I will do that. I will do a whole playlist on valuation, eventually. But, to get there, the first thing to understand is just the capital structure and how capital markets work in general. So that's what we're doing here. But anyway, so after you got the $10 million-- you had $30 million before, you get $10 million, your post-money is $40 million. And we had to issue a million extra shares to do it. So before the money we had three million and now we have four million shares. So let me draw what our balance sheet looks like. So we had $1 million and then we raised $10 million more. So if we look at the left-hand side of our balance sheet, we have $11 million in cash, and we have our website and intellectual property. Maybe we have some patents now. So you can say assets of the firm. I guess you could say non-cash assets, right? That's cash. And some of them could be intangibles, like branding. Or maybe we made some small acquisitions of other people. And we'll do more videos on actually the mechanics of acquisitions and all that. But you get the idea. These are all of the other assets of the firm, whatever they may be. And then on the equity side, because we have no liability, so in this case assets will be equal to equity. On the equity side of the equation we just have four million shares. 1/4 went to the Series B guy, 1/4 went to the Series A guy. He had bought a million shares, I think it was at $7.50 a share. Then the angel investor had given us a million shares at, and I think it was $5 a share, that was the angel. And then there's me and my buddies, we split the last, that first million shares five ways. And if I wanted to draw my sliver, I still have my 200,000 shares. And we could keep doing that. We could get a Series C and a Series D that will keep us going. But let's say that a couple of other people have decided to sell socks on the internet. And we realize this is becoming a very competitive space. And we really want to just lay down the gauntlet. And make sure that ours is the dominant player. Because we figure that whoever gets the biggest market share fastest, is going to become the and everyone else is going to turn into these me-too players and they're all going to go out of business. So size has benefits in this situation. So we don't want to do these piddly $10 million offerings and $20 million offerings. We want to go big time. We say, you know what? We're going to expand our company huge, we're going to push marketing hard. And so we want to raise a lot of money. Let's say-- let me make up a number-- let's say we want to raise, I don't know, we want to raise $50 million. $50 million to invest in the business and do some hard-core marketing. And it happens to be at a time-- let's say it's 1999. The stock market is racing ahead. People would love to get in on this kind of stuff. So we say hey, let's do an initial public offering. And then that has two benefits. One, we will be able to raise a lot of money for the firm to invest in maybe building distribution centers or the marketing that I talked about. And the other side benefit, which we won't really talk about much at the board meeting, but all of these people right now, they're all holding these shares, right? I have these 200,000 shares. This angel investor has this million shares. And there's really not a lot they can do with them, right? Maybe the angel investor, maybe he had an expensive divorce settlement and he has to make some alimony payments now, and he doesn't really have the cash. He can't do anything with these shares, right? Same thing with these VCs. These VCs are accountable to their investors. And they can say-- like, this VC can say oh, you know what? I bought those shares at $7.50 per share, and then this guy came and bought it at $10 per share, so I already got a 33% gain on my investment. But the investors aren't that impressed by that, because you're still holding the shares. You can't really say they're worth $10 until you actually turned them into $10. Or you turn them into actual cash. So, by doing an initial public offering, all of a sudden all of the players will have liquidity. Which means they can exchange what they have, including myself. So they can exchange what they have for actual cash if they need to. So how does that work? So I would go to an investment bank, although they've all turned into commercial banks now. But we're talking in a pre-2008 world. I would go to an investment bank and I'd say-- or more likely they would come to me and say hey, you guys could raise big money in the public markets right now. Why don't you do an IPO? And in a few seconds you'll realize why they are so keen to do it. And I say, sure. We can raise a lot of money. And also we'll be in the press, so that'll be free marketing in and of itself. So I say sure, do all of the work. So what they'll do, is there will be a lead underwriter. Let me write that down, lead underwriter. And that's essentially the person who does all of the legal work. They're going to file documents with the SEC that describe the company. And they're going to make models and projections and all that. And then they're also going to have people riding along with them, other banks. And they're going to form a syndicate. A syndicate is just a group of banks that work together to kind of handle a larger transaction than any one of them would be willing to handle by themselves. And it kind of spreads the risk amongst them. So the bottom line is what the banks do, other than doing all the legal work. They'll value the company and then they'll go to all of their clients. So all of the people who trade through that bank, all of the institutional clients, all of the hedge funds that have their prime brokerage accounts at those banks. And just so you know, a prime brokerage account is just like a brokerage account, but it's a brokerage account for big guys. It's a brokerage account for people managing $100 million and not their E-Trade account. That's all a prime brokerage is. And they'll go to these guys and say hey, we have this hot IPO issue, And we've done our models, and we think this is a $5 billion market. We think that this company is worth-- we think this company is worth at least $100 million in its current form. So once again realize, I mean, even though we're kind of doing something a little different now, all of the other things were essentially-- you could call them private offerings. Or private placements in some way. Essentially these were private equity sales. And I know that word is used a lot, private equity. And that's what venture capital essentially is. Although normally when people talk about private equity, they're not talking about venture capital. And I'll do a whole other video on that. But venture capital fundamentally is private equity, right? Because these shares that you're selling, they're not traded on a public exchange like the New York Stock Exchange or the NASDAQ, or something like that. So anyway, back to what we were doing. These guys, these banks, they go to their clients and say hey, I have this hot new issue. And they'll kind of gauge sentiment. They'll talk to clients, they'll talk to each other, and they say, oh you know what the demand is. And they'll essentially come up with some price, which is essentially as a high a price as-- they want do a high price because obviously as a company, I want to sell the stock for as much as possible. But they don't want to do it so high that the stock doesn't trade up. Most banks, you want your IPO to look like this. This is the first day of trading, this is your IPO price. They want it to look like that, so that in the future when there's an IPO, people get excited to get in it. If this IPO-- if the stock just did this, if it started collapsing, one, people will lose interest in IPOs in general. And then people will get suspicious about this company. And I'll do a whole video on that. So, how do the mechanics work? Well, they'll say, hey, you want to raise the $50 million, well you could do it a couple ways. We say hey, we're willing to issue another-- let me think of the best way to explain-- we're willing to issue another ten million shares, right? And I'm not drawing it proportionally. Let's say we're willing to issue another ten million shares, and this should be a lot higher, because this is four million right here. We're willing to issue a another ten million shares, how much money can we get for it? And let's see, these bankers talking to essentially the market, and talking to each other. They say hey, we think we can justify these guys, and we're going to do it for a little bit lower than they're actually worth. But we think the market will buy the fact that these guys are worth, I don't know, let's say they're worth $80 million in their current incarnation, right? Which essentially says, before we raise the money, we have $80 million, we have four million shares. So they're saying $20 a share. So if we go and issue another ten million shares at $20 a share, we'll actually raise $200 million. Actually, for the sake of-- so I don't have to edit my math-- let's say that's how much we wanted to raise, $200 million. So essentially what these guys will do, our board of directors will issue these new shares. And then this syndicate of banks, led by the lead underwriter will then sell it to their brokerage clients. To mainly institutional investors, but it might be some favored rich guys. If it's not that favored of an IPO, maybe you might get a call as well. And they'll sell it to all of them. And you say, why are they doing that? Why are they doing all of this work for the company, helping them raise $200 million? And they're going to the pain of the legal work, and they had to put a team of maybe ten guys on this. And they had to make models, and it probably took them maybe two or three months to do it. That's a lot of work, what do they get in exchange for all of this? Well they actually get a commission. And that commission, at least historically, has been 7% of the offering. 7% of the offering. And now you get a sense of why, in a good market, when you can do these things, why it has, in history, paid to be an investment banker. Because 7% of $200 million-- and frankly it's not a lot more work to do a $200 million offering than it is to do a $20 million offering, it's probably about the same amount. But 7% of $200 million is $14 million. So actually these guys aren't going to see $200 million. They're going to see 200 minus 14 million. So they're going to see $186 million. And then these bankers are going to split $14 million. And that probably is about two months of work for maybe ten guys. So you can imagine-- and of course they have the whole bank that has the support, and they have all these-- not anyone could do this. You have to have what they call retail distribution. You have to have kind of a channel that you can plug these shares into to actually get rid of the ten million shares. You see, it's a fairly profitable business. So that's what an initial public offering is. For the first time, a company is selling shares to the public, that is not just to these private investors. And usually on an initial public offering, although it's not always the case, these guys aren't selling their shares as much as they would like to. They're usually locked in for a certain period, just because it looks bad if, especially the insiders-- those were the founders of the company-- actually sell their shares. But six months later, then I can go and sell my shares. Maybe if I do it on a small amount, I can go and sell it in the NASDAQ. And I have a publicly traded price, so on any given day, I know exactly what my shares are worth. And this is an important thing to realize. Because a lot of times when people buy a stock they're like, oh, I've invested in that company. Well, kind of. When you normally buy a stock on an exchange, as the New York Stock Exchange, you're just buying the stock from somebody else. You're not buying the stock from that company. So when you pay $100 for an IBM stock-- I've run out of space, that's why I'm just talking and not drawing, let me erase this. I've run out of time, too. But I think this is an important point. When you buy stock from someone else-- so if I give my $100 and I get a stock certificate of IBM, most of the time, if I were to do this today, I'm just-- this is me, with a mustache-- I'm just getting it from some other dude, right? Well maybe he's happy because he got $100. He's got a top-hat. And this is what happens in the stock market every day. So when I buy that, I'm not really investing in IBM. I'm just buying the money-- I'm just buying that share from another guy. We're just exchanging shares. In an IPO, if I'm one of the IPO investors-- this is me-- my $100 in this situation-- let's see we're dealing with Maybe that's it's ticker symbol, SOCK. This time it's actually going to the company. It's actually going to the-- or the website, in this case. Of course 7% is being re-directed to the investment bankers. So when you buying from and IPO you really are, to some degree, making an investment. Just like if you were doing a venture capital. You really are making an investment in a company. Your money will then be used by the company to hire people and build factories and make out a website and do marketing. In this case, you're essentially just trading shares in a secondary market. Secondary market just means that it's not going to the actual company. It's just going to another shareholder who bought it before you. Anyway, I've really gone over my time limit. So I'll see you in the next video.



Courtyard of the Amsterdam Stock Exchange (Beurs van Hendrick de Keyser [nl]) by Emanuel de Witte, 1653. Modern-day IPOs have their roots in the 17th-century Dutch Republic, the birthplace of the world's first formally listed public company,[2] first formal stock exchange[3] and market.[4][5][6][7]
Courtyard of the Amsterdam Stock Exchange (Beurs van Hendrick de Keyser [nl]) by Emanuel de Witte, 1653. Modern-day IPOs have their roots in the 17th-century Dutch Republic, the birthplace of the world's first formally listed public company,[2] first formal stock exchange[3] and market.[4][5][6][7]
The Dutch East India Company (also known by the abbreviation “VOC” in Dutch), the first formally listed public company in history,[8][9] In 1602 the VOC undertook the world's first recorded IPO, in its modern sense. "Going public" enabled the company to raise the vast sum of 6.5 million guilders.
The Dutch East India Company (also known by the abbreviation “VOC” in Dutch), the first formally listed public company in history,[8][9] In 1602 the VOC undertook the world's first recorded IPO, in its modern sense. "Going public" enabled the company to raise the vast sum of 6.5 million guilders.

The earliest form of a company which issued public shares was the case of the publicani during the Roman Republic. 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 market in the Forum, near the 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.[10]

In the early modern period, the Dutch were financial innovators who helped lay the foundations of modern financial systems.[11][12] The first modern IPO occurred in March 1602 when the Dutch East India Company offered shares of the company to the public in order to raise capital. The Dutch East India Company (VOC) became the first company in history to issue bonds and shares of stock to the general public. In other words, the VOC was officially the first publicly traded company, because it was the first company to be ever actually listed on an official stock exchange. 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: corporate shareholders. As Edward Stringham (2015) notes, "companies with transferable shares date back to classical Rome, but these were usually not enduring endeavors and no considerable secondary market existed (Neal, 1997, p. 61)."[13]

In the United States, the first IPO was the public offering of Bank of North America around 1783.[14]

Advantages and disadvantages


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 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 freely in the open 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 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, through a secondary market offering. This type of offering is not dilutive since no new shares are being created.

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. This method provides capital for various corporate purposes through the issuance of equity (see stock dilution) 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, cheaper bank loans, etc.


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 which 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[15]


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 under the Securities Act of 1933.[16] In the United Kingdom, the UK Listing Authority reviews and approves prospectuses and operates the listing regime.[17]

Advance planning

Planning is crucial to a successful IPO. One book[18] suggests the following 7 advance planning steps:

  1. develop an impressive management and professional team
  2. grow the company's business with an eye to the public marketplace
  3. obtain audited financial statements using IPO-accepted accounting principles
  4. clean up the company's act
  5. establish antitakeover defences
  6. develop good corporate governance
  7. create insider bail-out opportunities and take advantage of IPO windows.

Retention of underwriters

IPOs generally involve one or more investment banks known as "underwriters". 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" 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 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.[19] Usually, the managing/lead underwriter, also known as the bookrunner, 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 main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main 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 firms with major practices in securities law, such as the Magic Circle firms of London and the white-shoe firms of New York City.

Financial historians Richard Sylla 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.[20] The direct public offering or DPO, as they term it,[21] 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:

Public offerings are sold to both institutional investors and retail clients of the underwriters. A licensed securities salesperson (Registered Representative in the USA 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 or overallotment option. This option is always exercised when the offering is considered a "hot" issue, by virtue of being oversubscribed.

In the USA, 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.[22] 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, where in 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.[23]

Before legal actions initiated by New York Attorney General Eliot Spitzer, which later became known as the Global Settlement enforcement agreement, some large investment firms had initiated favorable research coverage of companies in an effort to aid corporate finance 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 and analysis 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.[24] A typical violation addressed by the settlement was the case of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning of "hot" IPOs and issued fraudulent research reports in violation of various sections within the Securities Exchange Act of 1934.


A company planning an IPO typically appoints a lead manager, known as a bookrunner, 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").

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, or quickly selling shares for a profit, 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 IPO which helped fuel the IPO "mania" of the late 1990s internet era. Underwritten by 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 million 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.[25] The process of determining an optimal price usually involves the underwriters ("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 underpricing is through the use of IPO underpricing algorithms.

Dutch auction

A Dutch auction 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.[26][27] One version of the Dutch auction is OpenIPO, which is based on an auction system designed by Nobel Memorial Prize-winning economist William Vickrey. 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, 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,, Ravenswood Winery, Clean Energy Fuels, and Boston Beer Company.[28] In 2004, Google used the Dutch Auction system for its Initial Public Offering.[29] 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.[30][31] 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, 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 cited the reasons as "broader stock-market volatility and uncertainty about the global economy have made investors wary of investing in new stocks".[32][33]

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.[34] 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.[34]

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 certificates to the clearing agent bank's custodian, or a delivery versus 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 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" or selling them on the first day of trading.

Largest IPOs

Company Year of IPO Amount Inflation adjusted
The Alibaba Group 2014 $25B[35] $26 billion
SoftBank Group 2018 $23.5B[36] $24 billion
Agricultural Bank of China 2010 $22.1B[37] $25 billion
Industrial and Commercial Bank of China 2006 $21.9B[38] $27 billion
American International Assurance 2010 $20.5B[39] $24 billion
Visa Inc. 2008 $19.7B[40] $23 billion
General Motors 2010 $18.15B[41] $21 billion
NTT DoCoMo 1998 $18.05B[40] $28 billion
Enel 1999 $16.59B[40] $25 billion
Facebook 2012 $16.01B[42] $17 billion

The Government of Saudi Arabia is considering IPO of Saudi Aramco and selling around 5% of them.[43] The IPO has been predicted by Forbes to have a price of $100 billion.[44]

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, Shenzhen and Hong Kong) has been the leading issuer, raising $73 billion (almost double the amount of money raised on the New York Stock Exchange and NASDAQ combined) up to the end of November 2011. The Hong Kong Stock Exchange raised $30.9 billion in 2011 as the top course for the third year in a row, while New York raised $30.7 billion.[45] Indian Stock Markets are also emerging as a leading IPO market in the world. As many as 153 initial public offers hit the Indian stock market in 2017 and raised USD 11.6 billion.

See also


  1. ^ Note: the price the company receives from the institutional investors is the IPO price
  2. ^ Funnell, Warwick; Robertson, Jeffrey: Accounting by the First Public Company: The Pursuit of Supremacy. (Routledge, 2013, ISBN 0415716179)
  3. ^ Petram, Lodewijk: The World's First Stock Exchange: How the Amsterdam Market for Dutch East India Company Shares Became a Modern Securities Market, 1602–1700. Translated from the Dutch by Lynne Richards. (Columbia University Press, 2014, 304pp)
  4. ^ Brooks, John: The Fluctuation: The Little Crash in '62, in Business Adventures: Twelve Classic Tales from the World of Wall Street. (New York: Weybright & Talley, 1968)
  5. ^ Neal, Larry (2005). “Venture Shares of the Dutch East India Company,” in Origins of Value, in The Origins of Value: The Financial Innovations that Created Modern Capital Markets, Goetzmann & Rouwenhorst (eds.), Oxford University Press, 2005, pp. 165–175
  6. ^ Shiller, Robert (2011). Economics 252, Financial Markets: Lecture 4 – Portfolio Diversification and Supporting Financial Institutions (Open Yale Courses). [Transcript]
  7. ^ Macaulay, Catherine R. (2015). “Capitalism's renaissance? The potential of repositioning the financial 'meta-economy'”. (Futures, Volume 68, April 2015, p. 5–18)
  8. ^ Funnell, Warwick; Robertson, Jeffrey (2013)
  9. ^ Kaiser, Kevin; Young, S. David (2013): The Blue Line Imperative: What Managing for Value Really Means. (Jossey-Bass, 2013, ISBN 978-1118510889), p. 26. As Kevin Kaiser & David Young (2013) explained, "There are other claimants to the title of first public company, including a twelfth-century water mill in France and a thirteenth-century company intended to control the English wool trade, Staple of London. Its shares, however, and the manner in which those shares were traded, did not truly allow public ownership by anyone who happened to be able to afford a share. The arrival of VOC shares was therefore momentous, because as Fernand Braudel pointed out, it opened up the ownership of companies and the ideas they generated, beyond the ranks of the aristocracy and the very rich, so that everyone could finally participate in the speculative freedom of transactions."
  10. ^ "Books & Reading: Chapter One". Retrieved 27 November 2016.
  11. ^ Goetzmann, William N.; Rouwenhorst, K. Geert (2005). The Origins of Value: The Financial Innovations that Created Modern Capital Markets. (Oxford University Press, ISBN 978-0195175714))
  12. ^ Goetzmann, William N.; Rouwenhorst, K. Geert (2008). The History of Financial Innovation, in Carbon Finance, Environmental Market Solutions to Climate Change. (Yale School of Forestry and Environmental Studies, chapter 1, pp. 18–43). As Goetzmann & Rouwenhorst (2008) noted, "The 17th and 18th centuries in the Netherlands were a remarkable time for finance. Many of the financial products or instruments that we see today emerged during a relatively short period. In particular, merchants and bankers developed what we would today call securitization. Mutual funds and various other forms of structured finance that still exist today emerged in the 17th and 18th centuries in Holland."
  13. ^ Stringham, Edward Peter: Private Governance: Creating Order in Economic and Social Life. (Oxford University Press, 2015, ISBN 9780199365166), p.42
  14. ^ "Exhibits — America's First IPO — Museum of American Finance". Retrieved 12 July 2012.
  15. ^ Rose Selden, Shannon; Goodman, Mark. "The Shift in Litigation Risks When U.S. Companies Go Public". Transaction Advisors. ISSN 2329-9134.
  16. ^ "The Laws That Govern the Securities Industry". Securities and Exchange Commission. Retrieved 12 December 2014.
  17. ^ "UK Listing Authority". Retrieved 12 December 2014.
  18. ^ Lipman, International and U.S. IPO Planning, ISBN 978-0-470-39087-0
  19. ^ Series 79 Investment Banking Representative Qualification Examination, Study Manual, 41st Edition. Securities Trading Corporation. 2010.
  20. ^ Robert E. Wright, "Reforming the U.S. IPO Market: Lessons from History and Theory", Accounting, Business, and Financial History (November 2002), 419–437.
  21. ^ Robert E. Wright and Richard Sylla, "Corporate Governance and Stockholder/Stakeholder Activism in the United States, 1790–1860: New Data and Perspectives". In Jonathan Koppell (ed.), Origins of Shareholder Advocacy (New York: Palgrave McMillan, 2011), 231–51.
  22. ^ "Registration Statement on Form S-1". Retrieved 2017-12-10.
  23. ^ "The Main Players In An Initial Public Offering". 26 February 2012. Retrieved 22 July 2014.
  24. ^ "Ten of Nation's Top Investment Firms Settle Enforcement Actions Involving Conflict of Interest". 28 April 2003. Retrieved 23 July 2014.
  25. ^ Gould, Michael. "How Non-GAAP Measures Can Impact Your IPO". Transaction Advisors. ISSN 2329-9134.
  26. ^ Demos, Telis. (21 June 2012) What Is a Dutch Auction? – Deal Journal – WSJ. Retrieved on 2012-10-16.
  27. ^ Hasen, Richard L. (12 October 2012) What Is a Dutch Auction IPO? – Slate Magazine. Retrieved on 2012-10-16.
  28. ^ Sommer, Jeff (18 February 2012). "An I.P.O. Process That Is Customer-Friendly". The New York Times.
  29. ^ "Journal of Business & Technology Law - Academic Journals - University of Maryland Francis King Carey School of Law" (PDF). Retrieved 27 November 2016.
  30. ^ Hensel, Nayantara. (4 November 2005) Are Dutch Auctions Right for Your IPO? – HBS Working Knowledge. Retrieved on 2012-10-16.
  31. ^
  32. ^ WhiteGlove seeks to raise $32.5 million in 'Dutch auction' IPO. Retrieved on 16 October 2012.
  33. ^ Cowan, Lynn. (21 September 2011) WhiteGlove Health Shelves IPO Indefinitely – Retrieved on 2012-10-16.
  34. ^ a b
  35. ^ "Alibaba IPO Biggest in History as Bankers Exercise 'Green Shoe' Option". The New York Times. 18 September 2013.
  36. ^ "Softbank Corp IPO Second Biggest in History". 11 December 2018.
  37. ^ "Agricultural Bank of China Sets IPO Record as Size Raised to $22.1 Billion". Bloomberg. 15 August 2010.
  38. ^ "ICBC completed its record $21.9 billion IPO in October 2006". Bloomberg. 28 July 2010.
  39. ^ "AIA's IPO Boosted to $20.5 Billion With Overallotment". Bloomberg. 29 October 2010.
  40. ^ a b c Grocer, Stephen (17 November 2010). "How GM's IPO Stacks Up Against the Biggest IPOs on Record". Wall Street Journal.
  41. ^ "GM Says Total Offering Size $23.1 Billion Including Overallotment Options", Bloomberg, 26 November 2010
  42. ^ Rusli, Evelyn M.; Eavis, Peter (17 May 2012), "Facebook Raises $16 Billion in I.P.O.", The New York Times
  43. ^ "Saudi Arabia is considering an IPO of Aramco, probably the world's most valuable company". The Economist. 7 January 2016. Retrieved 23 May 2016.
  44. ^ Wald, Ellen R. "The World's Biggest IPO Is Coming: What You Should Know About Aramco". Forbes.
  45. ^ "China eclipses US as top IPO venue". 28 December 2011.

Further reading

External links

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