An IPO is the very first public issue of company shares , which is usually carried out through stock exchanges. This rather fashionable abbreviation came to us from Western practice. However, the process itself is regulated by Russian law, in particular, the law “On the Securities Market”. It establishes such procedures as the execution of a decision on the issue of equity securities , requirements for forms of identification of rights, the procedures for issue, state registration, requirements for the prospectus, etc. are indicated. All stages of the issue must comply with this law and other regulatory acts (including approved by the Federal Service for Financial Markets).
What is an IPO at its core? We can say that basically it is a program of presenting the company's shares to potential investors in such a way that the securities of the latter are of interest - and they bought them. The parties to this process are the issuing company, underwriters, lead managers (usually banks), the stock exchange and other persons. Underwriters play a key role, and for a fee they guarantee that such an IPO will take place.
Before making a public release, a company must establish itself in a certain way economically. To do this, she must have attractive financial statements for several years and good prospects for development, because every investor is interested in reliable and profitable investments. If the company is widely known for its products, has implemented promissory notes programs, issued bonds, then the probability of a successful placement of shares increases. In addition, “fame” allows you to conduct the first public issue with minimal organization costs. Initial public offering involves the placement of shares on the stock exchange, therefore, the issuer must also know how it meets the requirements of a particular platform - from the Russian MICEX-RTS to foreign NYSE or LSE.
Financial and other information is transferred to the lead manager, who prepares an information memorandum and organizes the so-called road show for the enterprise. During it, meetings are held with potential buyers of shares, the company is presented and information is circulated that such an IPO will be carried out on certain dates. Also, the lead-manager selects a set of underwriters, based on what the latter have investor bases, how good a reputation is, what is the cost of services.
Securities under the IPO can be placed in the following ways:
Fixed price method. This method provides the most equal access for all investors who only need to choose how many securities to buy.
Auction. In this situation, shares are sold primarily to those who can pay more.
The book method, which is the most common. The meaning of the procedure is that information on investor preferences is collected as part of the road show. Then the underwriters draw up an order book, set a price and distribute stocks. Moreover, in some cases, the risk of non-placement lies entirely with the intermediary, because he redeems a certain stake in himself.
What is an IPO - in terms of costs for the company? Experts note that this is a rather expensive process, as intermediary services can cost 3% of the issue amount, and additional costs for lawyers, auditors, advertising agencies can be about 1.5 million dollars for Russia and more than 2.5 million for foreign placements.