Going Public – IPO Lecture

EBD 481, Fall 2009

Galbraith
 Venture Capital Process
Seed 1st Round 2nd Round Clean-up
Money Financing Financing Financing
$50k $1 million $3 million $1 million

Year 1 Year 3 Year 5

Private Investment
Venture Capital Firms

Milestones and Benchmarks

 Going Public
Expensive (legal, accounting, publishing perspectives,
underwriting)
Complicated (filings)
Legal hurdles are substantial (state and SEC rules)
Timing is important

Underwriter
1st level
Company 2nd level IPO
Best effort
 Going Public - Details
Investment Bankers (Merrill,
Forms (audited financials) Lynch; Goldman Sachs + investment
bankers that specialized in IPOs)

S-1 (large offerings) Due Diligence

SB-1 (<$10m)
SCOR (<$1m)
• Direct Public Offering
(DPO)
Usually issue 20-40%
Primary v. Secondary
issue (unseasoned v.
seasoned)
File with SEC
Market securities
Preliminary Prospectus
(“red-herring”)
File S-1 documents
“Road Show” to potential
purchasers (mutual funds)
Costs (7% spread,
underpricing IPO)
IPO process
6 to 8 weeks before SEC registration
Issue Red Herring to see interest (filed with SEC) –no price or size
• Called Red Herring because of statements outlined in “RED”
Hold All-hands meeting, for IPO team and lead underwriter to
decide responsibilities
Start developing final prospectus
SEC Registration
Filing of S-1 documents and prospectus
SEC imposes quiet period (until 25 days after IPO)
SEC reviews documents
Form syndicate
Lead underwrite forms group of underwriters to help sell deal,
syndicate members are allocated shares to sell (best-effort or
bought deal/firm commitment)
IPO process
On the Road
Underwriters and management team put together road show for
prospective big investors, no media, last about 2 weeks; major
cities.
Can discuss business prospects, but only orally; can expand the
prospectus but not differ from prospectus
Lead underwriter gets indication of interest
Final prospectus is printed, distributed for investors
Investors subscribe to stock at an offering price
After market closes, day before public trading (IPO declared
effective)
List of buy/sell orders called the book
Difference between offering price and syndicate price about 7 to
8% (gross spread) – split between broker and underwriter
IPO process
Market opens, stock trades
Lead underwriter responsible for smooth trading
Can support stock, become market maker (SEC rules)
• Research: Over 50% of trading volume for first couple months
• Research: Buy back stock after trading (4% to 22%) – Why?
Impose penalty bids on brokers for flipping
IPO declared final (completion) 5 to 7 days after market
debut.
Quiet Period Ends (25 days after trading)
Press and brokers can start covering stock
New information can be issued by firm
Lock-up Period Ends (180 days after trading)
Insiders can start selling stock
Piggyback registration
What happens to stock prices after
an IPO?
Short-term underpricing
Why?
Long-term overpricing