Navigating the IPO Process in 5 Steps

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Over the last couple years, more and more companies have decided to go public. Whether it’s attracting a larger audience, establishing credibility with suppliers and vendors, or raising additional capital, there are many benefits to conducting an initial public offering. Finding the right approach and support group can be challenging but worth it. Here is a 5 step summary of how we believe you can best navigate through the IPO process and forever change your company’s future. If you are looking for something more in-depth, please review our official IPO guide.

Step 1: Selecting an Underwriter

 An underwriter is an investment bank specialist who works alongside the company issuing the IPO. Some of the most successful investment banks are J.P Morgan, Goldman Sachs, and Bank of America. These companies focus on capital financing for global and local businesses and sometimes even governments. They help determine the initial offer price, buy the shares, and then sell them to investors. That being said, underwriting an IPO can be a long and expensive process. However, a good IPO underwriter can be the difference between a successful IPO or a failure. 

Step 2: Setting Underwriter Terms

This second step is the most time consuming of all steps. At this point in the process, there is a pile of paperwork for both the company and the underwriter to fill out. Below are descriptions of said paperwork:

  • Firm Commitment– This agreement states that the underwriter will purchase all shares from the issuing company.
  • Best Efforts Agreement– The underwriter does not guarantee an exact amount of money, but does promise to sell as much of the securities offering as possible.
  • Syndicate of Underwriters– A group of banks will come together under the leading bank and ally. This allows the banks to sell part of the IPO, diversifying the risk.
  • Engagement Letter– This is the typical way to pay the underwriter’s fee and/or expenses, think of it as wholesale. Because the underwriter is buying all of the shares, they get a discounted price.
  • Letter of Intent– Consisting of three parts; underwriters intent to the company, company’s agreement to provide all information and cooperate, and company’s agreement to offer underwriter a 15% over-allotment option
  • Red Herring Document– Includes information about the company’s operations, excluding price and number of shares
  • Underwriting Agreement– Once the price of shares is determined, the underwriter is legally bound to purchase shares at the decided price.
  • S-1 Registration Statement– This is required to be turned into the SEC. There are two parts that agents at Colonial can assist you with:
  • Information required in the prospectus- this legal document must clearly describe the company’s business operations, financial state, risk factors, management, audited financial statements, and operations results. 
  • Information not required in the prospectus- the rest of the information that was not required to be delivered to investors but still required to be submitted to the SEC.

Step 3: IPO Roadshow and Setting the Price

The underwriter and issuing company travel to various locations and present their IPO to determine the amount of demand (if any). Once approved by the SEC, the underwriter and company can decide the effective date, initial offer price, and the number of shares. There are a couple of key factors agents at Colonial consider when pricing an IPO such as the reputation of the company issuing the IPO, the amount of money made from issuing company, the value of the company, and the success or failure of the Roadshow.

Step 4: Utilizing the Quiet Period

Now that you have just released your shares into the market, there is a short window after the IPO, known as a 25 day “quiet period”. During this time, there are two common strategies used: 

  • Greenshoe option (Over-allotment)– this clause allows for the underwriters to sell more shares than originally intended. This is a common choice because it is both SEC- permitted and risk-free.
  • Lock-up Period– typically between 90 and 180 days, insiders who owned shares before the company went public cannot sell their stock. This avoids driving the stock price down because of market flooding.

Step 5: IPO Closing: The Transition to the Open Market

You’re doing great and you’re almost done! After the “quiet period” has ended, your investors and underwriters transition from utilizing prospects to looking at your company in the market. Now that the company is public, the underwriter shifts into the role of advisor and they can give you a post-IPO-evaluation.

The process of going public takes time, something that Colonial thoroughly understands and values. With this short process overview in mind, feel free to review our official IPO guide for a more in-depth review of what it takes to IPO.

Navigating the IPO Process in 5 Steps

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