There are two syndicates: the underwriting syndicate, which are the investment bankers guaranteeing the sale of the offering and getting an underwriting fee (even when they have to buy it themselves), and a selling syndicate, which markets the shares to the public which collects a sales commission. Some firms can act as both syndicates. Investment banks specialize in large-scale, complicated financial transactions. Some of the most well-known investment banks are Barclays, Bank of America, Merrill Lynch, Warburgs, Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, Salomon Brothers, UBS, Credit Suisse, Citibank and Lazard. [3] X Research source
An investment bank will only want to work with you if you meet certain financial criteria. For example, they typically look for revenues of approximately $10 to $20 million and profits of at least $1 million. Also, they want projected annual growth to be relatively high for the next five to seven years. [5] X Research source
There may be other expenses charged by the underwriting syndicate, including the costs to print and distribute investment prospectuses. This commission pays the investment bank for assuming all of the risk. They are investing their own capital when they purchase your shares. They risk losing money on that investment if they cannot sell the shares to the public. For example, suppose you are offering 300,000 shares for $20 per share. You negotiated a firm commitment with an investment bank to purchase all of your shares for a 5 percent commission. On the day of your IPO, the bank purchases all 300,000 shares for $20 per share, which means that you made $6 million. But, the bank keeps 5 percent, or $300,000 in commission. Then, the bank turns around and sells the shares for $25 per share. They make a profit of $5 per share, or $1. 5 million. The total amount the bank earned in commissions and profits was $1. 8 million.
Required information includes how you plan to use capital you raise, information about your business model and your competition in the industry, a prospectus that details information investors should know, how you plan to price your shares and finally, disclosure of any potential conflicts of interest. [10] X Research source
This information would be provided in Part 1, Section 7 of form S-1. The Code of Federal Regulations (CFR) requires the following information to be disclosed: the name of each security holder; the nature of any relationship or position the security holder has had with the company or any of its affiliates within the last three years; the amount of securities owned prior to the offering; the amount of securities to be offered; and the amount the security holder will still hold after the offering. [11] X Research source While not required by the SEC, many investment banks will impose a lock-up period. This prevents you and others who hold private stock in the company from selling the stock for 90 to 180 days after the IPO. The purpose is to avoid depressing the value of the stock by flooding the market with shares. [12] X Research source Any shares that are sold into the general market must be registered or in a private sale to someone who will be restricted by the same non-pubic sale rules. Note that shares sold by insiders do not benefit the company, but increase the float (number of shares outstanding).
Underwriters usually limit the number of shares that can be purchased on the offering to maximize liquidity and encourage after-market purchases to supplement holdings. This is because It is normally not in the best interest of the company to have a few dominant shareholders.
Quantitative elements that affect price include demand, industry comparables and growth projections. Strong demand for your company’s product may lead to a higher IPO price or increased after-issue demands, protecting the offering price or causing it to go higher. Industry comparables, or the IPO price of other companies in the same industry, also factor into the price. Your future growth projections also significantly impact the valuation of your IPO. Qualitative factors include innovation, such as a new way of doing business or a product that will change the way things are done.
There are listing requirements for each exchange. Most companies begin on the NASDAQ and may go on to a listing on the NYSE. Many companies’ stocks trade on multiple exchanges simultaneously.
Don’t be concerned if the price of your stock doesn’t skyrocket on the day of your IPO. Analysts find that the most profitable companies start out slow but continue to build value over time. [20] X Research source The offering price is set by the underwriters who want to ensure an active after-market for the shares. However, the company does not receive any proceeds for shares traded in the after-market whether they are above or below the offering price. If you have included any of your privately-held shares in the offering, the proceeds from the sale will go to you, not to the company. This deal can only happen if disclosed to the SEC in the S-1 form and if the SEC approved the sale. [21] X Research source
For example, design a reporting cycle that defines when financial reports will be published. Public companies have a legal requirement to report financial data regularly to the SEC (4Ks, 10Ks, etc. ). By law, communications with the public and potential investors are severely limited before the offering and for a period thereafter. Use press releases to publicize key events, product development schedules and conference attendance. Good communication with shareholders will lay the foundation for a positive relationship. This will help with conflict resolution and facilitate future communication. [23] X Research source
Begin by getting to know analysts who cover your industry or business sector. Meet with them regularly and have them write reports about your company. However, analysts cannot write or publicize reports to the public until after the stock has bee traded for a certain period. Once you have a relationship with the analysts, meet with the bankers at their firms. Get to know institutional investors by attending conferences and other events.
