Investing in and attracting IPO’s is a huge and very important part of the stock market. There are many ways to attract investment. An initial public offering or IPO is one of the most profitable ways to attract investment.
IPO (Initial Public Offering) is the transformation of a private company into a public company, where its shares become available for direct sale to investors who previously did not have such an opportunity to buy them. An analogue of the term is “public offering of assets (securities)”. The number of investors in this process is unlimited
It is easy to understand that the bulk of the investments, in this case, comes from the sale of shares. But it should be noted that the issuing company makes a profit only on the initial sale of shares, which is called the IPO. Further profit from share transactions goes to investors or traders who conclude these deals directly. If the company retains part of the shares that were not offered to the market, it can issue them additionally, this also brings a certain profit.
The main goal of the IPO is to obtain finance for the further development of the company. At the same time, there is a strict rule: all funds that the company receives through an IPO go exclusively to the development of the company. They cannot be spent on anything else because it is prohibited, and financial regulators monitor compliance with this rule. If this condition is violated, the issuing company will be fined by a large amount
Another important goal when conducting an IPO is to increase the stock price. At the initial publication of shares, the rate often rises, and this happens quite sharply. Traders are actively following the news about new IPOs, because for them it is an opportunity to play on the price volatility and make a profit by selling previously purchased shares. Therefore, during the IPO, traders try to be one of the first buyers of the new shares. If an IPO is carried out by a large company, the demand for its shares is extremely high and accordingly, their price will push higher, which is favorable for the company
Company valuation. An IPO is very well suited for a comprehensive assessment of the company, its potential and value. Usually, this is useful information for the merger or reconstruction of the company, as well as a tool for motivating its employees.
Increasing liquidity. This refers to the capital of the shareholders of the company. After an IPO, they can sell part of their shares at a much higher price. Plus, it’s easier for them to get a secured loan.
It should also be noted that after an IPO, the accounting department of the company becomes as open as possible, which may serve as an additional factor to increase its credibility and reputation.
An IPO is a very serious step for any company, so serious preparation is required. After the IPO, the company will come to the attention of large potential investors and shareholders, so it is necessary to gain their attention and present the company in the most favorable light. To do this, the release schedule for new products is seriously analyzed, various public relations campaigns are organized, work is underway with news resources.
1. Find an intermediary
As a rule, the underwriter that takes over an IPO is a large and experienced investor and already has the necessary experience to organize the upcoming IPO. Most often, the underwriter is a very large bank or investment fund that takes a certain fee for its services, plus - there is always the opportunity to earn on an IPO by buying shares of the company before the listing starts, i.e. - at a price lower than the one that will be after the IPO. Underwriters conduct analytics and calculate the best starting price for the shares to be placed in the beginning and the amount that the company will be able to get with a successful IPO. There can be several underwriters, then they work in collaboration.
If you wish, you can do without an underwriter, but this entails the risk of errors and large losses. In addition to the underwriter, there are other intermediaries: auditors, brokers, market makers, book runners, analysts and many others. They also charge for their services, making it easier for the issuer to prepare for an IPO. It is important to clarify: an IPO cannot be done without intermediaries in principle.
Before the IPO, each company goes through a serious audit of financial regulators, which affects all levels. During the audit, the company will be assigned a credit rating, have its cost calculated, an be analyzed for compliance with international IFRS standards. After successful verification, the company is listed. But verification is never a one time occurrence. The company will go through inspections again and again in order to prove the legitimacy of its presence in the market and the absence of violations. In case of violations, delisting occurs, and the company leaves the securities market.
3. Drawing up an investment memorandum
An investment memorandum is a document that contains all the necessary information for potential investors, including: why do you need financial injections into the company, financial statements, the composition of the company's management, list of shareholders, etc. After the preparation of the investment memorandum, the document is sent to the appropriate regulatory authority. After the adoption of the document, an IPO date can be set.
4. Holding a Road Show
Road Show - part of a PR campaign, a series of meetings of top managers of the company with investors and analysts, where the presentation of the future IPO takes place. During the Road Show, potential investors have the opportunity to evaluate all the pros and cons of the company, as well as purchase a certain number of shares before bidding.
Preparation for an IPO is a long process, it takes many months. During preparation, the company may even cancel the IPO under the influence of any number of factors.
After the IPO, the company receives new opportunities to attract investment and loans. Listing in large financial markets enhances its status and prestige, as well as the level of trust on the part of lenders. The company is changing its legal status. The company's shares receive a new level of liquidity, they can be used as collateral or loan repayment.
Together with the status of PJSC (public joint-stock company), the company falls under more stringent control of financial regulators. The company will have to go through regular inspections of regulators and audits, to make all financial statements as transparent as possible. It is also necessary to hold meetings of investors, where to present reports on the status of the company, to conduct presentations of annual and quarterly reports.
In addition to the attention of regulators, the company at the same time will attract more attention from shareholders, traders and brokers. This leads to a strong reduction in the holders of controlling stakes and the possibility of large share sales, since this can adversely affect the volatility of stock prices.
In addition, from the moment of the IPO, all corporate events will be vigilantly monitored by market participants and shareholders, and accordingly they will be buying or selling shares of the company. Therefore, for owners of controlling stakes and the founders of the company, the sale of their shares in order to generate income may be limited due to the likelihood that such a move can be negatively perceived by the market, and, therefore, reduce the stock price and the overall capitalization of the company.
Not all IPOs can be successful, especially for lesser-known companies. Often, IPOs are postponed after a calculation, which does not show a satisfactory number of potential buyers of shares during their public offering. A clear understanding of what to expect from the IPO and subsequent events, what market interest you need to count on, what money you need to attract and how much to spend. In fact, this is a full-fledged investment of resources with a foundation for the future, therefore, an assessment of one's own potential should be thorough and correct.
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