20.

3 The Process of Going Public

1. Selecting Investment Bank (underwriter)
helps the firm determine the preliminary offering price, or price range, for the
stock and the number of shares to be sold.
sells the shares to its existing clients, which include a mix of institutional investors
and retail (that is, individual) customers.
regularly distribute reports to investors describing the stocks prospects, which
will help to maintain an interest in the stock.

Criteria of investment banker needed

Reputation and experience
Existing clients
Support post-IPO secondary market
 best efforts sale, the bank does not guarantee that the securities will
be sold or that the company will get the cash it needs, only that it will
put forth its best efforts to sell the issue.
an underwritten issue, in contrast, the company does get a
guarantee: The bank agrees to buy the entire issue and then resell the
stock to its customers.
2. File registration document with SEC
Jurisdiction. The SEC has jurisdiction over all interstate public offerings in amounts of $1.5 million
or more.
Registration. Newly issued securities (stocks and bonds) must be registered with the SEC at least
20 days before they are publicly offered. The registration statement, called Form S-1, provides
financial, legal, and technical information about the company to the SEC. A prospectus, which is
embedded in the S-1, summarizes this information for investors. The SECs lawyers and
accountants analyze both the registration statement and the prospectus; if the information is
inadequate or misleading, the SEC will delay or stop the public offering.
Prospectus. After the SEC declares the registration to be effective, new securities may be
advertised, but all sales solicitations must be accompanied by the prospectus. Preliminary, orred
herring, prospectuses may be distributed to potential buyers during the 20-day waiting period
after the registration is effective, but no sales may be finalized during this time.
Truth in reporting. If the registration statement or prospectus contains misrepresentations or
omissions of material facts, then any purchaser who suffers a loss may sue for damages.
3. Choose price range for preliminary prospectus
(1)acompany knows how many shares it plans to sell or (2) it knows
how much cash it needs to raise
4. Go on road show
The management team will make three to seven presentations each day to
potential institutional investors, who typically are existing clients of the
underwriters. The institutional investors ask questions during the
presentation, but the management team may not give any information that
is not in the registration statement.
The typical roadshow may last 10 to 14 days, with stops in 10 to 20
different cities. In many ways the process resembles a coming-out party for
the company, but it is more grueling and has much higher stakes.
After each presentation, the investment banker asks the investor for an
indication of interest based on the offering price range shown in the
registration statement.
5. Set final offer price in final prospectus
Typical first day returns
For 75% of IPOs, price goes up on first day.
Average first-day return is 14.1%.
About 10% of IPOs have first-day returns greater than 30%.
For some companies, the first-day return is well over 100%.