This is the amount of stock in an initial public offering (IPO) granted by
the underwriter to an investor. For most IPOs, the allocation is
significantly less than the indication of interest. The allocations are
meted out based on commission volume, trading history and type of investor.
Trading in the IPO subsequent to its offering is called the aftermarket.
Trading volume in IPOs is extremely high on the first day due to flipping
and aftermarket purchases. Trading volume can decline precipitously in the
following days.
Underwriters look favorably on investors who buy IPOs in the days after the
IPO first goes public. While underwriters cannot solicit aftermarket orders,
some expect investors to purchase two or three times their IPO allocation in
the aftermarket.
The
price appreciation (or depreciation) in IPOs is measured from the offering
price going forward. However, to obtain a better benchmark of IPO
aftermarket performance, some investors track performance from the first day
close.
Non-U.S. companies that wish to list on a U.S. exchange must abide by the
regulatory and reporting standards of the Securities and Exchange Commission
(SEC). These securities are called receipts because they represent a certain
amount of the company's actual shares.
When a company is considering doing an IPO, the company's executives
typically interview a number of investment banks to determine which ones
would do the best job of managing the offering and provide ongoing research
reports once the company is public. The parade of investment bankers through
a company's offices is known as the beauty contest.
These are state securities laws designed to protect individual investors.
The phrase purportedly originated from a state judge who said that the
securities of a particular company had all the value of a patch of blue sky.
Both companies and mutual funds are affected by state blue sky laws.
However, the SEC and Congress are in the process of superseding these rules,
because the rules in some states are obsolete, arbitrary and poorly
enforced.
The
composition of the Board of Directors is particularly critical for an IPO.
Typically, a board is composed of inside and outside directors. Inside
directors could be management, significant shareholders, venture
capitalists, vendors and relatives. Outside directors have no underlying
financial or personal relationship with the company that could create a
conflict of interest and are on the board for their experience, business
judgment and contacts. Outside directors may own stock, but are not large
shareholders. Investors should look for a board that has a majority of
outside directors. Typically, IPOs add their first outside directors at or
immediately after the offering.
The
book running manger is the underwriter controlling the offering. This
underwriter's name almost always appears on the top left at the bottom of
the cover page of the prospectus. In some cases, however, the underwriter
whose name appears in this position does not control the order book. That
role is taken by one of the other underwriters listed on the cover page.
That is why investors ask, "Who is the book running manger?"
If
an IPO trades below its IPO price in the aftermarket, it is said to be a
broken IPO. This is not a good thing. Regardless of fundamentals, investors
regard breaking issue price as a bad omen. In the old days of Wall Street,
syndicates of underwriters would prop up the IPO price with a stabilizing
bid, often for days. Due to profit considerations, the lead manager may
disband the syndicate even if the IPO is cratering.
These are brokerage firms with dubious reputations. Many of these are
fly-by-night operations, consisting of many brokers making cold calls to
investors. These shops specialize in low priced "penny stocks", which they
sell to one fool and then to a greater fool. The brokers may hop from shop
to shop, just ahead of federal regulators.
A
specific type of spin-off in which the corporate parent consolidates a
particular line of business and then sells that newly created subsidiary to
investors. In essence, the company is "carving out" a piece of its business
with a specific business focus and selling it to the public to highlight the
value of niche business operations within the larger company. Usually done
in the form of a true spin-off with an independent board and separate
financial statements, but heavy cross ownership by parent. Sometimes done in
the form of a tracking stock structure.
Litigation undertaken on behalf of shareholders against companies whose
shares have declined in price, alleging misstatements or omissions in the
prospectus or other material communicated to the public is called a class
action. These lawsuits, now harder to mount due to Federal legislation, are
spearheaded by a handful of law firms specializing in this area and are
focused on recent IPOs and technology companies.
Most initial public offerings and secondary offerings have more than one
underwriter. The manager controlling the offering is called the lead
manager. Other underwriters are co-managers. The names of these underwriters
appear on the bottom of the front page of the prospectus, with the most
important manager appearing on the top left, and the co-managers arrayed
from left to right in order of importance.
The
commissions paid to brokers for buying or selling stock range from 3 to 5
cents a share for institutions to 15 cents or more per share for individual
investors. But when you purchase an IPO at the offer price, you pay no
commission. Instead, the underwriter charges the issuing company a gross
spread, which is the difference between the public offering price and what
the issuing company received. Typically, this spread is 7% to 8% of the
IPO's offering price. The profitability of doing IPOs is one important
reason why investment banks focus on developing this business.
When investment bankers decide how to price an IPO, they study the
valuations of similar, already public companies. These are called
comparables. The pricing range indicated in the registration statement or in
the prospectus reflects the proposed valuation of the IPO relative to the
comparables. It is critical to select good comparables. Bankers sometimes
lean toward comparables with high valuations, but knowledgeable investors do
their own homework. Sometimes, an IPO may be the first company in its
industry to go public. Then, there are no comparables. In those cases,
investors look to analogous companies on which to base a valuation.
Companies that had no direct comparables at the time they went public
include Yahoo! andAmazon.com.
When an IPO is listed as day-to-day on the offering calendar, it means that
the lead underwriter does not have sufficient orders in the book. IPOs
listed as DTD are likely to be postponed.
Once a term used to describe professional investors who aggressively trade
stocks, bonds and other financial instruments to capture short-term swings
in prices, it is now applied to individuals who frequent small brokerage
firms that offer terminals and quote streams. These individuals use their
own capital - sometimes borrowed - to establish an account and then trade on
a short-term basis. The term is also applied to individual investors who
trade online for short-term gains. Regulators such as the SEC are currently
examining the operations of day-trading brokerage firms, who may be reaping
huge profits in the form of commissions at the expense of their high-volume
customers.
This is the short rebound a stock makes after is has dropped significantly
in price. It is likely caused by short sellers closing out positions rather
than real buying.
The
DTC is essentially a clearinghouse between institutional buyers and sellers
of securities and brokers. It allows institutional investors to seamlessly
buy and sell stock using multiple brokers, thus allowing them to unload IPO
shares without the underwriter knowing.
To
avoid the expense of high-priced lawyers and investment bankers, some
companies try to go it alone by selling their shares directly to the public.
This has been used by small consumer products companies with loyal
customers. These offerings are usually extremely small and highly illiquid.
As
part of the process of taking a company public, the investment bankers and
lawyers for the underwriters conduct an in-depth examination of the proposed
IPO. They speak with management about the company's prospects, strategy,
competitors and financial statements. Information that is material to the
company's prospects must be disclosed in the prospectus.
An
alternative to the traditional negotiated pricing process used by
underwriters to set IPO prices. This method requires the underwriter to
solicit bids from potential investors. Investors indicate the number of
shares that they want and the price that they are willing to pay per share.
Shares are then priced at the lowest clearing price. Allocations are made
with priority given to the highest bidders, first with regard to bid price
and then according to bidded share size. Because the only considerations
taken into account for allocating shares are the bid price and shares, this
pricing method does not discriminate between institutions and individuals
with regard to allocations. W.R. Hambrecht is the only investment bank to
employ this method and does so only through the use of an online bidding
platform.
Brokerage firms that both specialize in offering online trading capabilities
and participate in IPO underwritings are called e-managers. They have
arrangements with the lead managers to allocate a certain amount of the
offering to their customers, predominately individual investors. Many
e-managers allocate the shares on a first-come, first-served basis.
Established by the SEC, this is the system used by companies and mutual
funds to file documents electronically. It is significant to individual
investors, because you can directly access the EDGAR filing room on the
Internet and retrieve IPO prospectuses, annual reports and quarterly filings
for free.
These are high quality companies which drop below their issue prices due to
market conditions or lack of research coverage. Knowledgeable investors
often do screens of IPOs that have performed poorly to identify the gems
among the pieces of coal.
It
usually takes eight weeks for an IPO to complete the offering process, which
begins with the filing of the registration statement with the SEC and ends
with the pricing of the IPO. However, some companies are so confident that
their registration statements will pass SEC review with no changes that they
speed up the process by printing the preliminary prospectus immediately and
beginning the road show process. These IPOs are on a fast track.
After the IPO has been priced, the company prints a final updated prospectus
and distributes it to buyers of its IPO. The final prospectus contains the
information presented to the public in the preliminary prospectus, printed
before the offering, and updated for the price, shares offered, net
proceeds, recent financials, etc.
The
closing price at the end of the first day of trading reflects not only how
well the lead manager priced and placed the deal, but what the near-term
trading is likely to be. For example, IPOs that shoot up 100% or 200% on
their first day of trading are likely to fall back in price on subsequent
days due to profit taking. Conversely, IPOs that break offer price
immediately are likely to drop further as institutions bail out. Breaking
IPO price right out of the box is a poor reflection on the lead manager's
pricing and placement.
Flipping is practiced by market participants who try to get shares of stock
at the IPO price and immediately sell the shares in the aftermarket. While
many flippers are small players looking for a point or two of quick profit,
large, well-known mutual funds also practice flipping. It is a controversial
practice because the underwriters want to control the trading in the IPO
immediately after it goes public and the company wants their shares placed
with long-term investors. However, flipping also provides liquidity for
additional purchases of stock. The underwriters try to discourage flipping
by placing stock in the hands of long term investors, particularly ones that
have promised aftermarket orders. Nevertheless, flippers who are identified
by underwriters move on to flip again by setting up new firms. Brokerage
firms try to curb flipping by individual investors by imposing waiting
periods and fees on sellers and a penalty bid on the individual's broker. To
the underwriters dismay, however, the largest institutional investors and
mutual funds continue to flip with impunity because of their great size and
influence.
When a company is publicly traded, a distinction is made between the total
number of shares outstanding and the number of shares in circulation,
referred to as the float. The float consists of the company's shares held by
the general public. For example, if a company offers 2 million shares to the
public in an IPO and has 20 million shares outstanding, its float is 2
million shares.
IPO
shares set aside by underwriters to be allocated, at the behest of the
issuer, to individuals and entities which have a close working or familial
relationship with the issuer. These shares are sold at the IPO price.
Examples include: suppliers, top customers, consultants, employee relatives,
etc.
A
typical underwriting agreement allows the underwriters to buy up to an
additional 15% of shares at the offering price for a period of several weeks
after the offering. This option is also called the overallotment and is
exercised when the IPO is oversubscribed and trading above its offer price.
The ability to buy additional shares also allows the underwriter to manage
the aftermarket trading. The term comes from the Green Shoe Company, which
was the first to have this option.
When you purchase an IPO at the offer price, you pay no commission. Instead,
the underwriter charges the issuing company a gross spread, which is the
difference between the public offering price and what the issuing company
receives. Typically, this spread is 7% of the IPO's offering price. The
profitability of doing IPOs is one important reason why investment banks
focus on developing this business.
When underwriters allocate the overwhelming bulk of IPO shares to a small
group of large investors or an investment bank’s best clients. Usually
indicative of both high demand from big investors and the desire of the
issuer and banker to restrict distribution to a more knowledgeable and
stable investor base.
When there is significantly more demand than supply for an IPO it is said to
be a hot issue. The term hot issue has particular significance to the SEC
because federal law prevents hot IPOs from being sold to owners or employees
of broker-dealers and other industry insiders.
If
an investor is interested in buying an IPO, he or she will give the lead
manager an order for a specific amount of stock. Since most IPOs are
oversubscribed, indications of interest, or IOIs are usually for several
times what the investor really wants. On some deals, the valuation of the
IPO may be an issue. In this case an investor might give a limit order for
the IPO. For example, the investor might say, "I'm in up to $15", meaning
they will take shares if they are priced at $15 or less.
This is the event of a company first selling its shares to the public. Due
to unseasoned trading and lack of information, equities are often referred
to as IPOs for months, if not years, following their debuts.
Management, directors and significant stockholders are regarded as insiders
because they are privy to information about the operations of a company not
known to the general public. Insiders are restricted in the timing and
manner in which they can dispose of shares.
Individual investors often ask why the price at which an IPO starts trading
is different from its offer price. This occurs because the offer price is
set by the underwriters before the stock starts trading. Once the stock
starts trading, the price is determined by actual supply and demand and can
be higher or lower.
Prior to the offering, the underwriters involved in the IPO are prohibited
from issuing research or recommendations for forty days. Following the IPO,
the underwriter is allowed to issue a research report. These research
reports are invariably positive. Renaissance Capital, through its
IPO
Intelligence institutional research service, provides independent
analyses of these companies. Investors can purchase these reports on newly
public companies through Renaissance Capital's IPOhome.com
website.
This is the underwriter who has ultimate control of the offering. Other
underwriters are called co-managers. The names of the managers appear on the
bottom of the front page of the prospectus, with the lead manager's name in
the uppermost left. The lead manager controls all aspects of the offering,
including how many shares of stock the co-managers get to sell, the timing
of the road show, and the ultimate pricing of the deal.
The
lead underwriter restricts insiders from selling their shares for a period
of time - usually 180 days. However, the lead underwriter has the option of
lifting the lock-up period earlier. Knowledgeable investors track the
termination of lock up periods, knowing that stocks may weaken at about the
six-month mark.
The
total market value of a firm. It is defined as the product of the company's
stock price per share and the total number of shares outstanding. The market
cap should not be confused with the float, which is the amount of shares in
circulation. A company's market cap can greatly exceed the float, especially
in the case of a new publicly traded company.
The
SEC for years has allowed small companies to bypass the expensive system of
using an underwriter through the Small Company Offering Registration
process. The number of companies opting for a direct public offering has
increased with the advent of electronic commerce on the Internet.
The
Internet has opened up a new way for companies to sell their deals to the
public. Underwriters are starting to post on their web sites the
presentation that management makes to institutional investors. These net
road shows range from the video of an actual road show presentation,
complete with questions from investors, to slides accompanied by audio.
Regrettably, underwriters limit access to net road shows to institutional
investors by requiring passwords and changing them frequently.
This is the price at which the IPO is first sold to the public. It is set by
the lead manager, usually after the close of stock market trading the night
before the shares are distributed to IPO buyers. In the case of some foreign
IPOs, the pricing occurs over the weekend.
On
the front page of the preliminary prospectus, the company indicates a price
range within which they expect to sell stock. The range usually has a spread
of $2. For example, $15 to $17. However, the ultimate price to the public
may be above the range, below the range or within the range, depending on
demand and market conditions.
The
most powerful institutional investors merit private meetings with the
management of the IPO. As with the group road show presentations, management
is limited in its discussion to what is contained in the preliminary
prospectus.
The
operating margin of a company is a key measure of profitability and
performance. The operating margin is determined by deducting operating
expenses (e.g.. cost of goods and services, sales and marketing, general and
administrative, and depreciation and amortization) from total revenues and
then dividing the result by total revenues. Note that operating margin
excludes interest expense, interest income, other income, one-time gains or
losses and taxes.
When the underwriter refers to how well orders are building for an IPO or a
secondary deal, he means the book or listing of buy orders from investors.
The book for a deal can be many times oversubscribed. In fact, an
oversubscribed deal is desired by both underwriters and investors, because
it means that there will be an initial pop in the stock when it begins
trading and subsequent aftermarket orders.
This is the fancy name for the green shoe, the underwriting agreement which
allows the underwriters to buy up to an additional 15% of shares at the
offering prices for a period of several weeks after the offering.
When a deal has more orders than there are shares available it is said to be
oversubscribed. Many underwriters like to see a book several times
oversubscribed because they know that investors inflate the size of their
indications of interest. When a book is grossly oversubscribed it is said to
be a hot deal.
To
discourage individual investors from quickly selling IPOs, some brokerage
firms impose a penalty bid on the individual broker if his or her client
sells an IPO within a certain period of time. Thus, a broker who would incur
a financial penalty if a client wants to quickly sell an IPO has a built-in
conflict of interest. Long a little publicized practice, penalty bids are
now receiving greater scrutiny by the SEC and some state regulatory
agencies. In any case, individual investors should find out ahead of buying
an IPO whether the brokerage firm imposes penalty bids. However, if your
broker fails to return telephone calls or fails to sell securities as you
direct, you should seriously - and immediately consider - changing brokers.
This is a form of a preliminary prospectus containing no price range or
number of shares sometimes used by foreign companies doing an IPO in the US.
The proposed price range and estimated number of shares to be offered is
stated in the preliminary prospectus. The actual offering price and number
of shares is eventually set and published in the final prospectus.
Once a company files its registration statement (or S-1) with the SEC, it
becomes part of the
pipeline of
IPOs expected to be priced over the next few months. It usually takes an IPO
eight weeks to emerge from SEC review to its offering.
This is the offering document printed by the company containing a
description of the business, discussion of strategy, presentation of
historical financial statements, explanation of recent financial results,
management and their backgrounds and ownership. The preliminary prospectus
has red lettering down the left hand side of the front cover of the
prospectus and is called the "red herring." It is the company's principal
marketing document. Management, when touring on the road show, is limited to
discussing only the information contained in the prospectus.
This is what happens when an IPO fails to attract sufficient buyers.
Sometimes the lead manager will lower the price to entice buyers. When a
deal is postponed, it usually takes at least six months for an IPO to hit
the comeback trail.
In
a perfect world, IPOs are designed to be priced at a discount to existing
publicly traded companies. In theory, this is meant to reward early
investors for buying an unseasoned company with no public track record. In
reality, it is the lead manager's educated estimate on the highest price at
which there will be solid demand for the IPO, both on the offering and in
the aftermarket. The difference between the IPO price and its opening price
is called the premium. Some investors think the difference between the IPO
price and the price at the first day's close is a better measurement of the
IPO premium due to the confusion that normally surrounds balancing buy and
sell orders at the opening.
When a company files an IPO with the Securities and Exchange Commission
(SEC), it is required to state at what price it expects to price its
offering. This price is normally expressed as a range with a spread of two
or three dollars. For example: $10 to $12 or $15 to $18. The proposed price
range is generally, but not always (see
Quiet Filings), set at the time the company makes its IPO filing with
the SEC. Going forward, the proposed price range may be adjusted up or down
depending on market conditions and investor reaction to the proposed price.
Companies go public to raise money. The money raised is referred to as
proceeds. In every prospectus there is a section entitled "Use of Proceeds".
Investors should read this section to find out whether the company plans to
use the money it raises in the IPO for capital investment (good) or to pay
off insiders (bad).
A
derogatory term used to describe a company in an early stage of development
- that is, lacking revenues, operating profits and perhaps even products -
that ordinarily would be financed with private capital before accessing the
public markets via an IPO.
Sometimes a company has unresolved issues - choice of underwriter, number of
shares to be offered, timing, or thinks it may have a lengthy SEC review.
Such a company would make a quiet filing of its registration statement. The
registration statement might lack an offering range, number of shares to be
offered, or the total number of shares. The purpose of the quiet filing is
to get the SEC review underway.
After the IPO is priced, the underwriters face further restrictions on
issuing research. This is called the
quiet period. It
lasts up to 40 days. However, under some circumstances the underwriters can
issue a research recommendation more quickly. If the distribution is
complete, meaning they have disbanded the syndicate and are not exercising
the overallotment, the SEC allows a safe harbor for research.
Companies change the structure of their debt and equity because they have
too much debt and too little equity or because interest rates have dropped.
A recapitalization is akin to a mortgage refinancing for an individual.
Typically, when a company uses an IPO to recapitalize, it uses the proceeds
to pay off some of its debt and replaces the remaining debt with new debt
obtained on more favorable terms.
To
go public, a company must file a registration statement with the SEC. This
document, filed electronically via EDGAR, contains a description of the
company, its management and its financials. The material is reviewed by the
SEC for its completeness, amount of disclosure and its presentation of
accounting information. The IPO cannot go forward until the SEC is satisfied
with the document. In some cases such as when the SEC takes issue with a
company's accounting methodology, the registration process can take months.
A
common investment strategy is for the management of a company or a financial
group to acquire a company using debt. Buyouts are usually highly leveraged,
hence the name LBO. When the owners decide to use the IPO market to reduce
the company's debt load, the process is called a reverse LBO, because they
are replacing debt with equity. They are able to accomplish this only if
they have improved the operations of the company sufficiently to attract
public equity holders.
When a company launches its IPO, management schedules a nationwide series of
lunches, breakfasts and dinners to make its pitch to institutional
investors. These presentations are organized by the lead manager and are
held at hotel dining rooms in major cities. Usually, but not always, the
road shows start overseas, then move to the West Coast and finish in New
York or Boston, which have the highest concentrations of large institutional
investors. For particularly hot IPOs, these presentations attract hundreds
of investors who are jammed 10 or 12 to a table.
This is an IPO of independent companies in the same industry that merge into
a single company at the time of the offering. Mostly used in fragmented
industries, the approach has been applied to equipment rental firms, floral
distributors, office products distributors, travel agencies, temporary
staffing organizations, dental practices and car dealerships. Concerns about
roll-ups are the lack of combined operating history.
Members of the selling group are part of the syndicate, the group of
underwriters formed to underwrite an IPO. Today, the term "selling group" is
a bit of a misnomer because these underwriters usually get no actual shares
to sell. The manager and co-managers reserve the actual selling of IPO
shares (and the accompanying fees) to themselves. Selling group members are
usually listed on the prospectus because they performed prior services to
the company going public and get only a small portion of the fees from the
offering. However, selling group members do share legal and financial risks
of the underwriting.
These are the shareholders of the IPO who are selling shares at the time of
the offering. The front cover of the prospectus indicates the total amount
of shares being offered. The identities and breakdown of shares sold are
detailed within the prospectus. The prospectus will also indicate whether
shareholders will be selling on the Green Shoe. Investors should be
skeptical of any IPO in which shareholders are selling large amounts of
stock.
A
little talked about subject until the Wall Street Journal wrote an article
describing how some investment banks favored certain clients with IPO shares
in the hope of getting future investment banking business. For example, the
CEO of a privately held Silicon Valley software firm who has an account with
XYZ Securities might find that he or she was the recipient of a tidy profit
from several thousand shares of a particularly hot issue that was bought and
sold on the same day.
When a company sells a portion or all of a division to the public in the
form of an IPO they are doing a spin-off. The parent company would do a
spin-off for several reasons. First, to raise capital. The parent may be
highly leveraged. Second, to rationalize its operations by selling off a
non-core business. In this type of spin-off the managers of the newly public
company are (or should be) incentivized to perform well by holding stock in
the new company. Finally, a parent may decide to spin-off a division in
order to draw attention to the newly independent entity and perhaps to raise
the stock price of the parent.
After the IPO begins trading, the lead manager may decide that the members
of the syndicate need to support the stock price with aftermarket purchases,
and they make a stabilizing bid to ensure that the IPO doesn't fall below
its offer price.
Institutional investors usually make IPO indications of interest that are
several times larger than what they really want, hoping to end up with a
reasonable allocation. While this strategy works most of the time, sometimes
the order book doesn't build the way the lead manager hopes. At this point,
the lead manager can cut the price of the offering, which might increase
demand, cut the size of the offering, or give the institutional investors
all the stock they requested. This is getting stuffed. Institutional
investors who get stuffed usually think there is something wrong with the
stock and sell.
This is the group of underwriters formed to underwrite an IPO. A syndicate
might include underwriters who specialize in institutional business as well
as retail-oriented firms. Syndicates once had a legitimate selling function.
Today, the lead manager and co-managers usually do all of the selling. The
syndicate members just share in the risk of underwriting the IPO.
To
educate the sales force about an upcoming IPO, the lead manager will sponsor
a teach-in during which time the management of the IPO will make a
presentation to the sales force and answer their questions. This event
normally occurs at the launch of the road show.
When an IPO is completed, the underwriting group advertises their
involvement by publishing a list of underwriters in the financial press. The
underwriters are listed in descending order of importance. The lead
manager's name appears on the upper most left.
When a parent company wants to recognize the underlying value of one of its
businesses, it can either spin off a portion of the shares of the company to
the public, thus establishing a value for the business, or it can issue
tracking stock. Unlike the shares of a spin-off, which have claim to the
assets and profits of the spun-off company, a tracking share has no such
claim. As the term states, the shares are meant to "track" the performance
of that particular business. A parent company may choose to issue tracking
stock because it wants to retain full voting control over the business or
because the assets of the division cannot be easily separated from the
parent.
A
French word used to describe segments of the IPO being sold in different
countries. A multi-tranche distribution is commonly used for large U.S. and
foreign IPOs where there is demand both in the U.S. and in their home
country.
This is a brokerage firm that raises money for companies using public equity
and debt markets. Underwriters are financial intermediaries that buy stock
or bonds from an issuer and then sell these securities to the public. The
process through which this is accomplished is highly regulated by the SEC
and the National Association of Securities Dealers.
One
reason why IPOs are different from stocks in the broader market indexes is
that they lack a trading history, have a limited float and have not
developed long-term shareholders who are knowledgeable about the company.
For these reasons the stock is said to be unseasoned.
An
approach to valuing companies that relies on comparing a company’s stock
price to its income from operations, cash flow from operations, or earnings
per share. The higher the multiple, the more richly valued the company is.
Underwriters use valuation multiples of an IPO’s peers, or
comparables, to determine the appropriate level
at which the IPO should be priced.
Derogatory term for IPO issuers peddling products that are not yet
commercialized, or lack significant demand from potential customers. Often
used when the investment community harbors suspicions that an issuer’s
growth targets are not supported by past sales uptake. Also a generic
expression for companies with wildly optimistic hopes or speculative
business models.
Venture Capital firms, sometimes called private equity firms, invest in
private companies that need capital to develop and market their products. In
return for this investment, the venture capitalists exact a price -
significant ownership of the company and seats on the board of directors.
For the most part, venture capitalists focus on companies in the technology,
medical and retail sectors. Venture capitalists raise money from
institutional investors, state pension funds and high-net worth individuals,
usually in the form of limited partnerships. Investors should look at the
track record and expertise of the venture capital firm when evaluating an
IPO.
