2. IPO

Question 1

What do you need to start a company?

Answer 1

3 things: idea, team, $ (capital)

Question 2

What are the stages of raising capital for a company?

Answer 2

Stages:

0. FFF -> $ -> equity
1. Business angels (angel investors): typically less than 50K
2. Other options:
   - More VCs
   - PE
   - Strategic buyout (M&A)
   - Management buyout
   - IPO (or alternatives: SPACS, direct listing)

Question 3

What are the different stages in an IPO process?

Answer 3

1. Beauty parade
2. Syndicate
3. Red herring (prospectus)
4. Road show
5. Book building
6. Allocation

Question 4

What is beauty parade?

Answer 4

A formal selection process where candidate banks are assessed on a consistent and similar basis

Question 5

What is syndicate?

Answer 5

A number of investment banks and broker-dealers form a syndicate to sell new offerings of stock or debt securities to investors. The underwriting group shares the risk and aids in the successful distribution of the new securities issue.

Question 6

What is red herring?

Answer 6

A red herring is a preliminary prospectus filed by a company with the Securities and Exchange Commission (SEC), usually in connection with the company’s initial public offering (IPO). A red herring prospectus contains most of the information pertaining to the company’s operations and prospects but does not include key details of the security issue, such as its price and the number of shares offered.

Question 7

What is roadshow?

Answer 7

A roadshow refers to sales presentations pitched in different places to make up an initial public offering. A roadshow is also defined as a series of meetings held across different locations between the executives of an issuing company and potential investors in an initial public offering.

Question 8

What is book building?

Answer 8

Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price.

Question 9

What is IPO stock allocation?

Answer 9

Process in which investors are allocated shares

Question 10

What are alternatives to IPO?

Answer 10

• Direct listing: In this process, the company sells shares directly to the public without getting help from intermediaries. Companies that can’t afford underwriting, don’t want share dilution, or are avoiding lockup periods often choose the direct listing process, a less-expensive option than an IPO. no new shares are created and only existing, outstanding shares are sold with no underwriters involved.
• SPACS: a company that has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with an existing company. Also known as “blank check companies.”

Question 11

What is Direct Listing?

Answer 11

An alternative to IPO. In this process, the company sells shares directly to the public without getting help from intermediaries. Companies that can’t afford underwriting, don’t want share dilution, or are avoiding lockup periods often choose the direct listing process, a less-expensive option than an IPO. no new shares are created and only existing, outstanding shares are sold with no underwriters involved.
Examples: Spotify, Slack, Asana

Question 12

What is SPAC?

Answer 12

Special purpose acquisition company. also known as a “blank check company”, is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process.
Examples: DraftKings Inc. ChargePoint Holdings, Inc. , Virgin Galactic Holdings, Inc., Nikola Corporation, and Opendoor Technologies Inc.

Question 13

Why Would a Company Go Public Through a SPAC and Not an IPO?

Answer 13

To save time and money. Going public through an IPO is a lengthy process that involves complex regulatory filings and months of negotiations with underwriters and regulators.

Question 14

Issues with IPO?

Answer 14

1. MLOTT

2. Underpricing - winners’ curse

Question 15

What is MLOTT?

Answer 15

• MLOTT = the difference between the closing price on the first day of trading and the offer price, multiplied by the number of shares sold. In other words, this is the first-day profit received by investors who were allocated shares at the offer price
• Reason: The main cause for leaving money on the table is short-run underpricing which rewards positive financial returns for initial investors at the very first day of trading

Question 16

What is the winner’s curse?

Answer 16

Winner’s curse = paying more than the intrinsic value of an asset.
If an IPO is overpriced, the informed investors will withdraw from the market and then the uninformed investors become more likely to receive a larger allocation.