Question

Discuss the activity of bringing securities to market in initial public offerings (IPOs). Be sure to include in your answer definitions and descriptions for all the relevant terms that I discussed, including: Investment bankers, syndicates, tombstones, prospectus, red herring, shelf registration, Dutch auctions, road shows, and all of the advantages and disadvantages of going public.

Answer 1

Initial Public Offering(IPO)refers to the act of offering the shares of a private company to the public for the very first time.Through an IPO the company intends to raise money through it's equity offerings.The IPO process has various parties and components involved during various stages of the process.

Investment Banks

Investment banks refers to a financial institution that offers underwriting services,intermediary services between issuer and the investors,facilitate mergers and corporate reorganizations etc.In an IPO the investment bank may offer underwriting services,may act as an intermediary ,offer financial advisory.Underwriting refers to the purchase of a said number of shares of the issuing company by the investment bank with the intention of reselling them on the stock exchange.

Syndicates

A syndicate with regard to an IPO refers to the coalition of brokers and investment banks that's formed with the intention of handling a large transaction(IPO)The purpose of the coalition is to handle the large transaction(IPO) as a group rather than individually.

Tombstones

Tombstones refer to advertisements placed by the investment bakers who act as the underwriters of an issue of stock.The details given in such an advertisement would be the the number of securities offered,credit rating of the offering,availability date etc.

Prospectus

Prospectus refers to formal the document required by the Securities and Exchange Commission to be filed by a company that wishes to offer it's shares to the investing public.The prospectus will contain details regarding the offering,the risk associated,the fund management , fees etc

Red herring

red herring refers to the preliminary prospectus that the issuer has to file with the SEC when the issuer wishes to make an IPO.The red herring prospectus will be devoid of the complete particulars regarding the price of the securities or the number of securities.

Shel Registration

Shel registration refers to the process by which the issuer is permitted to register new shares without having to offer them immediately.The issuer is given up to two years to issue the shares.This often helps the issuer to time the issue of shares in accordance with the market conditions.

Dutch Auctions

Dutch auction is also known as a descending price auction,in a dutch auction all the auction bids(from highest to lowest) is taken into consideration to determine the optimum price of he offering.Dutch auctions are often used by companies in IPO to minimize the under pricing and to earn a fair price on the IPO.

Road Shows

In an IPO context road show refers to presentation conducted by the company that wishes to make an IPO at different locations.The presentations will feature top executives of the company and underwriting firm.The purpose of such meetings is to introduce the offerings of the company to potential investors

Advantages and disadvantages of going public

The biggest advantage of going public is the funds]s that the company can raise through the IPO.The money can then be used for expansions ,debt repayment etc.another advantage of going public is the prestige associated with being a listed company.this in turn would create public awareness about the company.Another advantage is that the company can use it's public stock as a means to compensate it's employees.The major disadvantage associated with going public is the costs associated with an IPO.The underwriters fee , the cost of obtaining the services of financial consultants and expenses associated with compliance might make the IPO an expensive affair.Another disadvantage is the effect the sale of shares can have on the company's ability to make decisions for itself,some times the company will have to make decisions that are in the best interest of it's stock holders rather than going the way the management wishes to.Another caveat of going public is the requirement to be file financial statements with SEC in accordance with US GAAP.This might prove to be expensive and monotonous