A Basic Understanding of Initial Public offerings

A Basic Understanding of Initial Public Offerings

August 10, 2005

Investments FIN 3105

Table of Contents

Creation of IPOs ………………………………………………………………………………… 2

Contract ……………………………………………………..…………………………… 2

Structured Agreements ………………………...………………………………………… 2

Underwriters ……………………………………..……………………………………… 2

Securities and Exchange Commission (SEC) …………………………………………………… 2

Registration Statement …………………………………...……………………………… 2

Investigation …………………………………………...………………………………… 3

Prospectus …………………………………………………..…………………………………… 3

Red Herring ……………………………………………………………………………… 3

Road Show ………………….…………………………………………………………… 3

Price …………………………...………………………………………………………… 3

IPO Allocation ……………………...…………………………………………………………… 3

Institutional Investors …………………………………………………………………… 3

Individual Investors …………………………...………………………………………… 4

Researching an IPO …………………….……………...………………………………………… 4

Key Elements ……………………………..…...………………………………………… 4

Lockup Period ………………………………....………………………………………… 4

Flipping …………………………...…………...………………………………………… 4

Overall IPO Basics …………………………...………………………………………..………… 5

Form …………………………...………..……………………………………..………… 5

Categories …………………………....………………………………………..………… 5

Reasons to go Public …………………………...………………………………………..……… 5

Internet Boom …………………………...……...……………………………………..………… 6

References …………………………...………………………………………….……..………… 7

A Basic Understanding of Initial Public Offerings

Initial Public Offerings (IPOs) are common ways for small companies to grow and expand by increasing their availability of capital. The Initial Public Offering started seeing a strong increase in popularity in the late 1990's. As a result of the growing popularity resulting in the dot com explosion, the term "IPO" became a household name. In order to understand how IPOs work, its best to first know how IPOs are created.

IPOs are created by underwriters. The first step in creating the IPO is to hire an investment bank and negotiate a contract. The contract will state the type of securities (either stocks or bonds), the amount of capital to be raised, and the details of the actual underwriting agreement. The company and the investment bank determine the structure of the contract. There are two different types of structured agreements. The first type of structured agreement is the firm commitment agreement, in which the underwriter