A company planning an IPO usually appoints a lead manager whose initial job is to determine at what price stock shares should be sold.

This manager, called a book runner, usually works usually comes to the price in one of two ways:

1. The company sets the price (fixed price method), or

2. The price is set by investor demand data (book building).

Under and Over Pricing

On occasion IPOs are intentionally under-priced. This causes high-paced stock buying and selling. Buyers often buy as much stock as they can and quickly sell it for a profit, known as stag profit, as the stock price fluctuates based on supply, demand, and the expected fair market price. From the issuer’s position, underpricing “shorts” the issuer potential capital that the company may need and certainly could use.

Overpricing is just as dangerous as under pricing. Facebook’s IPO came out at 36 U$D and is still under that today. Demand was low and the underwriters must have had a very difficult time selling the shares they committed to sell. Adding misery to injury the stock demand may well fall, causing the price to fall along with it. If the underwriter promoted the stock to valued clients by red herring, and these clients lose money investing in the IPO, they may decide not to be clients in the future, having lost both money and confidence in the underwriter.

Because overpricing and under pricing are both undesirable, every endeavor must be made to make sure the price is low enough to stimulate demand in the stock and not short the issuer money as well as not overprice, to cause people to lose interest in the stock. This process usually involves selling large blocks of stock to institutional investors.

More on Quiet Periods

There are two quiet periods:

1. The period following the filing of the registration statements (company S1) and before the date the SEC declares the S-1 effective.

As previously mentioned, during this quiet period, people with confidential information are restricted from discussing the IPO; and

2. During the 40 calendar days following the IPO’s first day of public trading.

During this period insiders cannot make any statements on earnings or release research documents.

Other quiet periods:

There is a 10-day quiet period after a Secondary Offering and a 15-day quiet period before and after the expiration of security offering “lock-up agreement.”

Alternative Public Offering (APO): A Quick Alternative to a Traditional IPO

An additional option to a traditional IPO is the alternative public offering (APO) which combines a:

1. Reverse Merger, and a

2. Private Investment in Public Equity (PIPE).

Concepts

A Shell company is a public company that does not have assets or liabilities.

In a Reverse Merger a private company becomes a public company by merging (or being acquired) with a “shell” public company. The shell company’s stock is traded under the private company’s name from the date the merger/acquisition takes place.

A PIPE occurs when a publicly traded company privately negotiates with and sells its stock to private investors such as hedge or mutual funds. The stock sold private investors are traditionally unregistered restricted stock and sold is by investment banks at a discount to current market share prices.

At the closing of the Alternative Public Offering (APO):

– The private company and shell sign documents and complete a reverse merger.

– They file Super 8K documents with the SEC which is a legal requirement to announce the merger.

– They file a registration statement with the SEC, enabling the registration of PIPE shares.

– The PIPE funds are released to the company from escrow.

– A public announcement of the transaction is made.

– The company stock trades under former private company’s name.

Quick Details

At the close of an APO the company is fully funded and has the same SEC requirements as the IPO. Further, sometime before 120 days the company’s registration should be active with the SEC.

After being considered active with the SEC, the company can then apply for a listing on the NYSE, AMEX, or NASDAQ and after approval, usually within 30 days, the company will be scrutinized by analysts and the company will reviewed for its strength around in open road shows and conferences.

When the APO transaction is complete the company has:

– Institutional investors

– Equity financing

– An Exchange listing

– Analyst coverage

– Market value

In spite of all the advantages to this quick method of going public, the two significant disadvantages are:

– Since the investors are buying restricted stock, they expect a discount, and

– It takes at least 6 months for a liquid market to develop for the company’s stock.

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: Finances
Keywords: Finance,Business Funding,Venture Capital