IPOs are sold through exchanges to retail customers and institutional investors by SEC licensed commissioned salespeople. The commission is included in the underwriter’s fee, and is known as a concession.

– Retail customers are considered the general public.

– Institutional investors, such as banks, insurance companies, and pension funds, are organizations which pool large sums of investor money and then invest those funds with wide discretion. Often these investments can be in real estate, in already issued stock, and in Initial Public Offerings of common stock.

The Preliminary Steps

Issuance of a Registration Statement

After a company files the necessary paperwork, known as a “registration statement” with the SEC, there is period of time called the “quiet period’ or “waiting period” where the SEC allows only a limited amount of information to be released to the public.

In general the company or broker cannot release any information that would cause a current stock price to increase or decrease. This releasing of information can be considered insider information.

The Red Herring

During the initial waiting period (quiet period) in the United States, clients may be given a preliminary prospectus known as a “red herring.” The prospectus is called this because it has a bold red warning printed on the front cover that states that the offering is incomplete and may be changed.

During the quiet period stock shares cannot be offered for sale; however, brokers may take indications of interest from clients. After the final prospectus is cleared through the SEC, the IPO can be offered and potential buyers can convert their indications of interest into buy orders.

Dutch Auction

An IPO may be offered through a Dutch auction, whereby the stock is allocated to buyers in an impartial way where all buyers pay the same price per share of stock. There are variations of the Dutch auction such as the Open IPO, which is a similar model to the one used to auction Treasury securities. The entire auction for the stock is private and the winning bidders pay the same price per share.

Some companies that have been taken public using a variation of the Dutch auction procedure include Google, Clean Energy Fuels, and the Interactive Brokers Group.

Investment banks usually do not want to take stock public through Dutch auction or its variations since everyone pays the same price for the stock. Favorable treatment the underwriter may give their long standing clients is thus eliminated.

Traditional IPO vs. Dutch auction

There are many differences between the traditional IPO and a Dutch auction. The decision which method to use with an IPO depends on your point of view.

For example:

– If the goal is to get the most money possible for the issuer, then a traditional IPO could be used as long as the “per share price” is close to the top end of the price range.

– If the goal is to take the stock public considering the view of the investor, then a Dutch auction could be used, since pricing is set by what the investor will pay.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Author Bio: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Category: Business
Keywords: Finance,Business Funding,Venture Capital