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A Sneak Peek of What Initial Public Offering or IPO is All About
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Google, the world’s Internet search engine giant, went public in April 30, 2004 in effort to raise $2.7 billion worth of additional investments.
The Madison River Communications Corporations also went public in December 23, 2004.
Telemar Participacoes SA pulled out their initial public offering last August 16, 2006, due to changes in market conditions. It is the biggest cancellation of IPO this year, with over $1 billion worth of IPO withdrawn. In addition, a total of $3 billion worth of IPO have been withdrawn so far in August, making it the worst month for cancellations for 2006.
These are just some of the “past and present” events that happened within the business community with regards to initial public offering or IPO. For individuals who do not follow the latest events in the business world, IPO is nothing but a simple three-word term. However, for investors who are planning to increase the profitability of their business, IPO is an essential component for them.
What is initial public offering or IPO? In financing, the term applies to the first sale of a corporation’s common shares to the public. Its major purpose is to raise additional capital for the corporation that will be used on various purposes, especially with regards to business operation. In other words, instead of securing a business loan to finance possible business expansion, many corporations files an IPO before the Securities and Exchange Commission (SEC), which is the governing body for IPO process.
Aside from SEC, there are also underwriters which are composed of several investment banks that will offer the corporation’s common shares to interested public investors through different methods. They usually assess the value of shares to the market, and paid by commission based on the percentage of the value of the shares sold to the public. In addition, since the IPO process are also governed with heavy legal requirements, corporations under IPO hire the services of major law firms across the country to help them draft a prospectus that will contain the corporation’s background, finances, and other related information. Such prospectus will be attached to the offer for sale as mandated by the regulations governing the process.
The aforementioned procedure is common on small and not well-known companies. For larger IPO deals (which involves multinational corporations as the issuer or the one selling common shares to the public), it is typically underwritten through a syndicate which is a group of major investment banks that have established themselves in the finance industry. In most cases, the commission that underwriters earned in large IPO deals reaches up to as high as 8 or 9 percent.
All IPO deals in the United States are under the jurisdiction of the Federal Securities Act of 1993 as well as state laws related to the conduct of IPO. If the deal will be done in Europe, the European Union (EU) have unified laws relating to IPO (the Prospectus Directive of 2003) despite the absence of any central regulatory mechanism for the process.
Underwriters in European IPO deals generally have joint and several liabilities for the underwriting of all offered shares for sale. It is relatively different compared to U.S. rules, wherein the underwriters are separately responsible for the allotted portion of the offering.
That is what initial public offering or IPO is all about, regardless of the country the deal will take place.
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