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What is an IPO? And How Do I Get In On One?

© Michelle Hogan

In order to raise capital to fund existing operations, expansion plans or new business ideas a company will "go public". An IPO (Intial Public Offering)is the first public offering of stock in that company. It will raise a substantial amount of cash so that the company in question can pursue it's plans. This company may need to raise additional cash and can then have a secondary public offering. This offering, also called a "follow-on" issues new equity securities by the said publicly traded company.

In order to issue the new stock to the public, a company hires an underwriter. Underwriters are generally investment banks and play a very critical role in the process.in addition to providing the company with financial advice, they then buy the issue and resell it to the public. The underwriter adds value by seeing how receptive the public is to the company and then being able to properly price the shares. The company will then go "on parade", with the investment bank touting it's virtues, to see where the intial price should be. In a case like iVillage, the underwriter intially thought it's shares were fairly priced at $12 to $14/share, then after delays and much press, iVillage was delivered at $24/share.

IPO's were traditionally on sold to institutional investors, however with the advent of online brokerages and individual investors having more direct access to the market, IPO's are now being offered to individual investors.

Before they issue shares, a company must register with the Securities and Exchange Commission (the SEC). The statement contains detailed information about the company and it's business. The SEC then reviews the statement and it's prospectus to make sure that they follow certain legal requirements. After the SEC deems that the company has conformed to the appropriate requirements, they will clear it for sale. The SEC does not approve or dispprove, nor do they guarantee the accuracy of the disclosures, it simply clears it for sale. After the issue has been cleared, the shares can be priced and then firm orders can be accepted.

During the period of time when the registration has been filed but not yet cleared, anyone interested can obtain the preliminary prospectus. This prospectus has detailed information about the company, an estimated date of issue and an estimated price range. This is when those interested can place their "indications of interest" for the offering. This isn't a firm committment to buy, only when the issue has been cleared can one make a firm committment to buy. If you work with a broker who allows access to IPO's, make sure you find out what the procedures are, as the time between the clearing and placing orders is usually not very long.

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