Vade mecum – IPO

 IPO – first sale of stock by company to the public

 Companies
 Private – few shareholders and not so strict in terms of disclosure of information
 Public – large number of shareholders and very strict regulations
 Why go Public?
 Easier to obtain cheaper debt
 Prestige
 If demand exists then issue more
 Trading in open markets means liquidity
 The Process
 Underwriting – raising money through debt or equity (in this case equity)
 Middlemen between issuers and public
 Company & Investment Bank negotiate deal
• Firm Commitment – IB guarantees that a certain amount will be sold by buying
the entire offer and then reselling to the public; responsible for unsold inventory
• Best Efforts agreement – underwriter sells securities but does not guarantee the
amount raised
 Deal agrees then sent to SEC with all relevant financial info
 “Cooling off period”
• SEC evaluates
• Underwriter puts together Red Herring - initial prospectus (w/o offer price and
effective date
• With Red Herring – Underwriter and Company put up a “Dog and Pony Show”
to court institutional investors
• Offering Circular – abbreviated prospectus given to individuals and brokerages
to generate interest abt the IPO
• Price arrived at
• Stock sold to investors

Epili Sagar ©
 Vade mecum – IPO
• Tombstone – a written advertisement placed by investment bankers giving basic
details of the issue
 IPO - hard for small investors to get their hands on
 Things to Consider
 No History – scrutinise Red Herring
 Management goals for use of IPO money
 Underwriters? Big or small?
 Research asa possible on company
 Lock-up period – a time period specified by underwriter till which insiders of company
cannot sell their stocks. But asa they can, they all sell to realise profits and it puts a
downward pressure on price.
 Flipping – IPO stock is sold in early days to earn quick profit
 Discouraged since company looking for LT investors
 PTN – be wary of buying IPO shares in early days because price will see sharp fall
once institutions book profits.
 Avoid Hype – buy if you consider it a good investment; not just because it is an IPO
 Other Terms
 Eating Stock – when underwriter is forced to buy stock if it is unable to sell the IPO
 Greenshoe Option – whereby underwriter is allowed to sell more stock than originally
intended because the supply increases to meet the demand and prevents wild price
fluctuations
 Greensheet – summary of prospectus outlining both GOOD and BAD points of the IPO
for the insiders of an underwriting firm.

Epili Sagar ©