IPO

Definition
Initial Public Offering. The first sale of stock by a company to the public.
Companies offering an IPO are sometimes new, young companies, or sometimes
companies which have been around for many years but are finally deciding to go
public. IPO’s are often risky investments, but often have the potential for
significant gains. IPO’s are often used as a way for a young company to gain
necessary market capital

What Is the Meaning of an IPO in the Stock Market?

When companies decide to raise capital, they often do so by going public and selling shares
of stock. The initial sale of a company's stock is known in the stock market as an Initial
Public Offering, or IPO. Many IPO’s are the subject of intense investor attention and interest,
but the process allows few, if any, opportunities for average individual investors to take part
in the initial sale of shares.

Going Public

1. When a company decides to go public, it first hires an underwriter, usually

a large investment bank. The underwriter agrees to buy all shares of the
company's stock minus the investment's firm commission, usually about 5 to
7 percent.

SEC Filing

2. After the company secures an underwriter, it files a prospectus with the

federal Securities and Exchange Commission.

Selling the IPO

3. The underwriter commits to buy all the company's shares but plans to sell
most of them to its biggest institutional clients. Often, the underwriter will try
to generate interest in the stock among its biggest clients.
 Subscribe

4. Interested institutional clients "subscribe" to the offering. A subscription is

a commitment, albeit non-binding, to buy shares of the stock. The underwriter
tries to set a per-share price as high as possible, while still selling the bulk of
the stock.

Opening Day

5. On the day of the IPO, the underwriter buys all the company's shares and
then sells all subscribed shares to the institutional clients. Most investors
cannot get in on the IPO unless they have large accounts at the institutional
clients that subscribed.

Trading

6. Shares of the company's stock can be traded when the credit is made in
the institutional investors' accounts.

IPO is an acronym for initial public offering. The term indicates a company is bringing shares
of stock to the market for investors to buy and trade. An IPO gives investors the opportunity
to invest in a company that was formerly privately owned. Sometimes investors can double
or triple their money in a couple of days with a hot IPO stock.

The Players

1. Before a company begins selling shares on the stock exchanges, all of the
shares are owned by the company's founders, private investors and/or
venture capitalists. Selling a portion of the company shares into the market
allows the business to raise capital to fund internal investment and growth. A
publicly traded stock also puts a value on the shares retained by the private
owners. To take the company public, the management hires an investment
banker or group of investment bankers to manage the IPO and make the
initial placement of the shares sold.

The Process

2. Before a company can sell shares in an IPO, it must file a form S-1 with
the Securities and Exchange Commission. The S-1, also known as the
prospectus, is an extensive document that describes the company's business
and historic financial results. The investment banker then goes to the major
investment firms and institutional investors to solicit orders for the stock and
 determine an IPO price. The IPO price is generated by the investment banker
trying to get the highest price from the large investors and still get orders for
all of the shares to be sold.

Trading Begins

3. On the date of the IPO, the shares are sold to the institutional investors at
the pre-determined IPO price. Some of these investors will hold the shares as
long-term investments and some will attempt to sell the shares immediately
for a quick profit. These shares are the first to hit the stock exchange and
trading will start at the highest bid price for the new shares. The price at
which an IPO stock starts trading can be significantly different than the IPO
price paid by the institutional investors.

Historic IPOs

4. In November 2010, General Motors came out of bankruptcy to issue the

largest IPO in history for the amount of money raised. The GM IPO was worth
over $20 billion. Prior the GM, the record IPO was Visa going public in 2008,
raising over $19 billion. The next three largest IPOs in U.S. stock market
history were AT&T Wireless in 2000, Kraft Foods in 2001 and UPS in 1999.

List of Mutual Funds That Hold IPO


Mutual funds that invest in IPOs offer unique opportunities.
Initial Public Offerings (IPOs) have always injected excitement into the stock
markets with the promise they offer. Everyone hears about the IPO that is bought
at $15 and then sold at $76 two months later. While a hot IPO can be extremely
profitable, IPOs overall actually under-perform the broad market on average. For
this reason, investors who want to capture the profits of a hot IPO should
consider investing in Mutual Funds that hold IPOs as part of the fund's portfolio.

The Direxion Long/Short Global IPO Fund

 The Direxion Long/Short Global IPO Fund has a unique strategy that strives to
control risks while maximizing potential profit. Portfolio selection is based on
market size, float, fundamentals and earnings potential. The fund views the IPO
life cycle in three distinct stages.

The first stage focuses on the first 60 days of the IPO. The IPO is purchased and
added to the fund if it is deemed under-priced. The second stage focuses on the
first year of the IPO beyond the first 60 days. The first year is often when the
stock over-performs, upon which it will be purchased and added to the fund. The
third and final stage of the IPO looks beyond the first year. This is generally the
period where the stock under-performs, and the fund will then take short
positions on the stock.

Renaissance Capital IPO Plus Fund

 The IPO Plus Fund was one of the first mutual funds to focus primarily on IPO
investing. It offers a unique investment opportunity to investors since they can
put their cash into several IPO’s simultaneously.

Renaissance Capital recognized that most investors did not have the time to
research and evaluate every new company that goes public each year.
Renaissance was in a perfect position to offer the IPO since they have been
writing IPO research reports for investors for over 20 years. The IPO Plus Fund
is a "no load" mutual fund and only requires a minimum investment of $5,000
($2,500 for IRAs).

First Trust US IPO Index Fund

 The First Trust US IPO Index Fund invests in the IPO’s that comprise the
IPO100 Index. The fund has committed to investing at least 90 percent of its
assets into these IPO’s. The index basically measures average performances of
U.S. IPO’s throughout their first 1000 trading days. Additionally, the index is
reconstituted and adjusted quarterly.

The benefit of this fund is that it captures economic growth in new companies
and sectors using a passive systematic approach. The fund is also tilted toward
middle capitalization and large capitalization companies, which give it stability
and lower the overall volatility associated with IPOs.

CheckList for Mutual Funds Evaluation


Investors should choose mutual funds that match their tolerances for risk.
Evaluating the performance of a mutual fund starts with understanding how the
investment company is putting the pooled assets of you and other investors to
work. The starting point for mutual-fund investors is the fund's prospectus. The
prospectus contains information on the fund's strategy and investment purpose,
such as providing income or both growth and income, or preserving capital. The
cost and fees to invest in the fund also are detailed. In addition, up-to-date details
about the specific investments in a mutual fund are available from independent
research sources such as Morningstar. Mutual funds also issue annual and semi-
annual reports to their shareholders, detailing their holdings and returns for the
specified period.

Money Management
 The prospectus contains a discussion of what investments are permitted and
prohibited of the mutual fund managers. This permits evaluation of a mutual fund
to assure that the fund objective is aligned with an investor's.

Each investment strategy is associated with certain risks. These risks are
disclosed in the prospectus. This allows comparison of the risks associated with
the fund's investments to the type of risk expected by an investor. The next step
is examining the current investment structure of the mutual fund. This information
is available from many online sources and from the most recent report of the
mutual fund. Details to examine include the investment categories in which the
mutual fund is presently invested and the percentage that each category
comprises of the fund's total assets. Additional data provides the fund's current
investment percentages in various regions of the world.

Performance
 A mutual fund report discloses details about past performance over various
periods. This history is usually provided as an average annual return over one
year, five years, and ten years. A mutual fund will also compare its performance
to a reference index. Investors should assure themselves that the selected
market index is a reasonable representation of the fund's type of investments.

Even more important is an examination of the mutual fund's performance in

specific years. By examining an extended period of years, an investor can
determine the consistency of a fund's performance. This permits comparison of
the fluctuation in investment returns to an investor's tolerance for risk and
volatility.

Fees
 Operating expenses of a mutual fund are paid even if the fund loses money.
These expenses are taken out of a fund's assets and lower the return to
investors. The largest component of expense is the fee paid to a fund's
investment manager. Other expenses include custodial services, taxes, legal
expenses, and accounting fees. Some funds have a marketing cost---referred to
as a 12b-1 fee---which is also included in operating expenses. The most recent
report from a mutual fund will list expenses as a percentage of the fund's asset
value. This is the investment return percentage that investors lose by having to
pay the fund's operating expenses.

The cost to a mutual fund for buying and selling of securities is not broken down
in the operating expenses percentage. One way to gauge whether a mutual fund
is incurring significant trading costs is to examine the turnover ratio. This is the
percentage of the fund's assets that have traded in the recent period. For
example, a turnover ratio of one hundred percent indicates that all of the assets
at the beginning of the period have been sold and replaced with new securities.
High turnover results in the fund paying higher prices for buying and selling
securities, and can cause dividends to be paid that increase taxes.

Some mutual funds also charge sales commissions for buying shares of the fund.
A front-end sales charge---or "load"---is deducted from an investor's money when
purchasing the mutual fund. Only the amount remaining after the load is invested
in assets of the fund. Other sales commissions are charged when an investor
sells mutual fund shares. This type of fee usually declines and is eliminated the
longer shares are held. The effect of both up-front and deferred sales charges is
to reduce return on investment. Alternatively, some mutual funds are "no-load,"
which means that an investor pays no commission and the entire investment
amount is added to the assets of the fund

The Best Long-Morning Star lists over 13,000 mutual funds available in the U.S.
markets. Mutual fund performance changes dramatically from year to year as business
cycles change. If you use the Morning Star mutual fund screener, you can find the top
performing funds over the past year, three years or five years. Unfortunately, past
performance does not always tell you what the future will hold. The best way to achieve top
performance in your long-term portfolio is to implement some basic fund strategies.

Best Performing Fund Categories

1. According to Value Research, mutual funds that focused on banking

stocks vastly outperformed other funds between 2006 and 2011. During this
period, banking stock funds had an average annual gain of more than 21
percent. The next best performing category during this period was multi-cap
funds, which invested in a mixture of large companies and small companies.

Managed Versus Index

2. Mutual funds can be actively managed or designed to mirror stock

indexes, such as the S&P 500 or NASDAQ. According to The Motley Fool,
studies have shown that index funds have historically outperformed managed
funds by an average rate of 2 percent per year. This may not sound like a lot,
but for long-term investors, 2 percent a year can add up to a substantial
amount.

Tax Deferral

3. Regardless of which fund you buy, funds held in a tax-deferred account,

such as a 401k plan or IRA, always outperform funds held outside these
types of accounts. For example, if you invest $10,000 in a fund that earns an
average return of 6 percent in a tax-deferred account, it will grow to more
than $57,000 over 30 years. If you invest in the same fund outside a deferred
account, it would only grow to $28,000 over that same time period.

Asset Allocation
While banking funds outperformed the market in recent years, as of 2011, they
will not always be the top performers. Top performing funds change over time.
According to CNN Money, asset allocation is the best way to ensure your
portfolio performs well over time. Asset allocation is a method of dividing your
long-term investments over various investment categories, such as stocks, bonds
and other securities. Every investor has specific goals and needs, so the best
mix will vary among investors. To find the right mix for you, you may choose to
consult with a professional financial adviser or planner.

What Is the Difference Between IPO & VC

Stocks?
An IPO, or initial public offering, and VC, or venture capital, refer to stock investment and
cash generation methods, but are specifically different in their purposes and end results.

IPO

1. An initial public offering, or IPO, occurs when a company begins to sell its
common stock to large investors or the general public.

VC

2. A venture capital, or VC, stock transaction occurs when a private company

seeks investment from other private companies or individuals, and offers
company stock only to those investors.

Purpose

3. An IPO may be used when the company no longer wishes to be held

privately, wants to expand, or wants to offer the ability to make money by
holding stock. On the other hand, a VC stock transaction occurs generally
where a new business needs cash to get started. VC investors look for the
money making potential in new businesses and products.

Disposition

4. An initial public offering is generally the last step; that is, the stock is
offered and purchased by investors, and then the company becomes publicly
held. Venture capital exchanges may be the first step in a company becoming
public. For example, after a while, the company with VC investors may decide
to go public with an IPO.

VC Stock Conversion

5. VC stock is usually sold as convertible preferred stock, which means that

a VC investor can convert stock into common stock at any time. Also, an IPO
would convert VC stock into common stock.
 What Is the Difference Between Preferred
Stock & Regular Stock?

Most people have some familiarity with the terms "common stock" and "preferred stock."
Both classes of stock offer ownership interest in a company, but investors receive different
benefits based on the stock's class.

Stock Classes

1. A company assigns different classes to its stock. Stock classes can

include callable preferred, convertible preferred, cumulative preferred and
more. The two most common classes are common stock and preferred stock.

Common Stock

2. Most investors purchase a company's common stock. Common stock

typically pays a dividend and offers the shareholder voting rights at annual
shareholder meetings.

Preferred Stock

3. Preferred stock typically does not offer voting rights. Preferred stock
shareholders receive dividends before common stock shareholders.

Preferential Treatment

4. If a company fails, preferred shareholders stand among the first to receive

payment, along with a company's creditors. Common shareholders are last in
line to receive any compensation.

Dividends

5. Specific company rules dictate the exact terms of preferred stock, but
most preferred shareholders receive a fixed dividend payment. Common
shareholders receive a dividend based on earnings per share after operating
expenses are accounted for.

Impact of Changes in IPO Guidelines

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The board of Securities and Exchange Board of India took a row of decisions in
relaxation of IPO norms along with decisions in continuous listing requirements for
companies, amendments to mutual funds regulations and venture capital norms.
These changes took effect early this year.

The Sebi board slashed the minimum stake a company must offload in an initial
public share offering (IPO), reduced the minimum size of the offering, made new
norms relating to the offers made through Book Building method etc. What are the
effects of changes in these norms? Who is benefited and who is not?

In a move to create a level playing field, Sebi extended to all companies the right to
offload just 10 per cent of their post-issue capital instead of the current minimum of
25 per cent. Earlier, only firms in the ICE sectors were allowed to offer 10 per cent.
The rule was relaxed to avoid discrimination against firms. Relaxation of this norm is
advantageous both from the company’s point of view and from the retail investor’s
point of view. The right to offload 10 percent of their post issue capital instead of 25
percent, means that only 10 percent is available for the retail investor now instead of
25 percent available before. The company will have more of the capital with them
now, which can be offered to institutional investors. For a public issue the number of
institutional investors form a major chunk of the total investors, while retail investors
form a small portion of the total investors. In the recent times we saw a number of
issues getting devolved due to non-subscription of the issue. There was a mismatch
between the portion of the capital offered to institutional investors and retail
investors. Issues were oversubscribed by the institutional investors and
undersubscribed by retail investors. Therefore with 15 percent more of post-issue
capital available to them they can have more subscriptions and allotment. From the
retail investors’ point of view, when there are not enough subscriptions from them,
and when the scrip gets listed on the stock exchange it receives poor response from
them and the price of the scrip would fall. According to the new changed norm the
institutional investors have more capital for them and therefore there are less
chances of lack of subscriptions from retail investors and therefore when the scrip
gets listed it would receive good response and the price of it may rise.

Another argument for the reduction in IPO from 25 percent to 10 percent of the total
paid up capital, is as follows. To avail this facility, market capitalisation of a company
should not be less than Rs 2,500 cr. As Sebi has already allowed Software,
Telecommunication, Media and Entertainment companies to offer only 10 percent of
their paid up capital in IPO, this relaxation in the norm was required for the new
economy companies, as it was found that there were large number of companies
with market capitalisation of over Rs 10,000 cr who wanted to get themselves listed.
If a minimum requirement of 25 percent of paid up capital was made applicable to
them, the issue size of the offer should have been in the vicinity of Rs 2,500 cr. This
would have forced these companies to go to international market to get themselves
listed. But in the old economy, there is hardly any company which has market
capitalisation of over Rs 1000 cr and is not listed. Therefore, even if this suggestion
were accepted by Sebi to make it a guideline, there would hardly be any company to
accept it.
The board also decided that the issue should be made only through Book Building
method with allocation of 60 per cent to Qualified Institutional Buyers (QIBs). Book
Building method is a good method of price determination of the issue. The price is
determined by the investors themselves i.e., the market itself decides the price.
There is no scope for price manipulation. There are two types of Book Building
methods. One is 90 - 10, where 90 percent of the total issue size is for book
building, 10 percent is fixed price. The other is 75 - 25, where 75 percent of the total
issue size is for book building and 25 percent is for fixed price. From the portion
which is there for book building (90% or 75% as the case may be), 60 percent
should be allocated to QIBs, 15 percent to Non Institutional Investors and 15 percent
to Retail Investors. This means that QIBs hold majority stake in the company. In
other words QIBs manage the company. Since QIBs are Financial Institutions, Mutual
Funds etc., they can manage the company in a better way. Efficiency of the
management increases. Promoters find no scope for price manipulation.

But the conflicting area, is compatibility with the company’s listing agreement with
the stock exchanges. The BSE requires companies to have minimum five
shareholders for every Rs 1 lakh of capital issued. If the companies have to follow
new IPO norms, they would not be able to comply with this condition of the BSE as
60 percent of the IPO has to be allotted to QIBs. And for a small issue of say Rs 10
cr, the entire portion allotted to QIBs i.e., Rs 6 cr may be picked up by just one or
two entities.

The Board also removed the restriction of minimum public issue size of 25 crore in
the case of an IPO through Book Building and allowed all companies to make issue
through Book Building. However, if the track record criterion is satisfied, allocation to
QIBs can be less than 60 per cent. Removal of this minimum restriction is
advantageous to small companies (in terms of market capitalisation) and new
companies, which don’t have a track record.

Sebi also made amendments to Venture Capital Regulations, 2000. According to the
amendment made in the Venture Capital regulations, with the approval of the
Ministry of Finance, venture funds can remain invested in a venture more than a
year after an initial public offering and can claim benefit of tax pass-through. The
original regulations had insisted on compulsory exit one year after an IPO of
forfeiture of the tax pass-through advantage. This change will prove to be a good
boost to venture capital funds in our country. Venture Financing is still in a dormant
stage and definitely requires a major thrust. This amendment should prove to be a
boon to this area, an area which will keep our primary market alive and active and in
turn improve our economy.

All in all, whether the changes in the IPO regulations are likely to have a tremendous
impact or not, only time will tell. But sources say that these changes would eliminate
unwanted elements from participating in money raising activities in the market and
give Sebi an opportunity to bring more transparency in the market.

Why do an IPO? Objectives of IPO and Alternatives

Taking Your Company Public
For the small to medium range company without the experience or expertise, the concept of taking
the enterprise to the public market is often considered the ultimate corporate success. This goal is
often re-reinforced by certain capital investors which view an initial public offering ("IPO") 5-7 years
"down the road" in the investment cycle as a means to achieve their economic goals on return as
well as a convenient exit strategy-

For the owners of a private firm, it is suggested that the expected benefits from an IPO strategy
should be carefully and objectively weighed, since the dream and reality can often be two entirely
different things. Firms may go public for any number of reasons, but the common elements tend to
be cash and/or additional leverage opportunities. There are accordingly two separate issues - (1) do
the expected benefits of an IPO outweigh any disadvantages; and (2) is success from an IPO that
clear and is there exit strategy for any downside possibilities?

There are various alternatives to an IPO if cash and stable financing are the only issues. The real
issue is how much new responsibility is the company prepared to assume for its expectations. For
example, the entire preparation and process for an IPO (i.e., time and costs for professional
assistance, internal company support, and underwriting) is substantial, as well as the on-going
compliance with regulatory and new stockholder requirements. Investor relations will take on a
whole new and far broader meaning, both in terms of time and money.

Once the IPO step has been taken, the company's options may in fact be become more limited.
Unless the company is thereafter successful, "going back to the well" may not be either feasible or
available. Reversing the public ownership process may be either difficult or impossible.

For example, many firms in the bio-industry were selling in the $50 a share range not long ago, and
currently are down under $10. The public markets tend to have a rather short term focus and
success of an IPO and its value longevity may be based on factors even unrelated to the particular
company's results or future products.

The above areas are noted solely to emphasize the need for the private firm to objectively
investigate all available options, weighing the costs versus benefits across the entire spectrum, with
the input of experienced and trained professionals. Certainly, if the owner is seeking an exit
strategy as well, an IPO may be a very successful option. if the owner seeks to manage and/or be a
part of the "bigger picture", then the issue may be entirely different.

One alternative to the IPO approach is "strategic partnering". Although it can be fashioned in
number of forms to suit the venture and the players, at its essence, it is the partnering with one or
more investor companies, which in addition to cash, typically brings valuable industry expertise,
resources, and/or bargaining power to the enterprise. The investment decision, unlike the public
market, is usually not driven by "internal rate of return" expectations on the cash invested. Rather,
the investment view tends to be long-term in nature and predicated on product market share
considerations/expectations.

Strategic partnering opportunities may be more difficult to obtain, but then the potential benefits
of remaining private with "deep pockets" and/or significant resources support may indeed make it
worth the effort. Large companies are usually not known for innovation, quick and creative
answers/solutions to product/service market needs. Large companies do typically have significant
cash and very effective sales and distribution resources. To that end, one should seek partnering
relationships with companies that understand your specific company business and can benefit from
the arrangement on a long term basis.

Strategic partnering can be a very flexible arrangement, custom fitted for the parties and their
needs. Once the arrangement has been established, the relationships need to be well structured,
clearly delineating the rights and responsibilities of each party. As in any transaction, all parties
must be comfortable with and trust the relationship to ensure the benefits to each as originally
envisioned.

Successful partnering can as well provide more flexibility in obtaining additional outside financing,
both public and private, as well as better rates, terms, and conditions. Even the public market
option may still be available.

It must be noted that almost 95% of all companies $10 million to $100 million in revenues never go
public. As well, there are many large companies which are not, and would not consider the public
market for financing, a notable local example being M&M Mars in McLean, Virginia (multi-billion
dollar enterprise).

If your firm is approaching or at the critical stage for determining and acquiring significant capital
for firm expansion or increased market share, this overview may be of immediate benefit. The key,
as in any good business decision, is professional input on the available options, objective evaluation,
and aggressive implementation. Strategic partnering is one of those options with a proven and very
effective means to achieve a wide range of management and investment goals.

Henry Barratt, Partner Boles & Co. McLean, VA (703-35&2117