What is an IPO and how much does it cost an issuer

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

IPO is the very first public issue of a company's shares, which is carried out, as a rule, through stock exchanges. This rather fashionable abbreviation came to us from Western practice. However, the process itself is regulated by Russian legislation, in particular, by the Law on the Securities Market. It establishes such procedures as drawing up a decision on the issue of emissive securities, requirements for forms certifying rights, the procedures for issuance, state registration, requirements for a prospectus, etc. All stages of an issue must comply with this law and other regulations (including approved by the Federal Financial Markets Service).

What is an IPO in essence? We can say that this is basically a program for presenting the company's shares to potential investors in such a way that the latter are interested in the securities - and they buy them. The parties in this process are the issuing company, underwriters, lead managers (as a rule, these are banks), the stock exchange and other persons. Play a key roleunderwriters who, for a certain fee, guarantee that such an IPO will take place.

Before it can go public, a company needs to prove itself economically in some way. To do this, it must have attractive financial statements for several years and good prospects for development, because every investor is interested in reliable and profitable investments. If an enterprise is widely known for its products, has implemented bill programs, issued bonds, then the probability of a successful placement of shares increases. In addition, "famousness" allows you to conduct the first public issue with minimal organization costs. Initial public offering involves the placement of shares on the exchange, so the issuer must also know how he meets the requirements of a particular site - 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 a so-called road show for the enterprise. During it, meetings are held with potential buyers of shares, the company is introduced and information is disseminated that such an IPO will be made on certain dates. The lead-manager also selects a set of underwriters based on what investor bases they have, how good their reputation is, what the cost of services is.

Securities under an IPO can be placed using the following methods:

1. Fixed price method. This method providesmaximum equal access for all investors, who only need to choose how many securities to buy.
2. Auction. In this situation, shares are sold first to those who can pay the most.

3. The book method, which is the most common. The meaning of the procedure is that within the framework of the road show, information is collected about the preferences of investors. The underwriters then complete the order book, set the price, and distribute the shares. At the same time, in a number of cases, the risk of non-placement falls entirely on the intermediary, because he redeems a certain block of shares for himself.

What is an IPO - in terms of costs for a company? Experts note that this is a rather expensive process, because. intermediary services can cost 3% of the issue amount, and additional costs for lawyers, auditors, advertising agencies can be about $1.5 million for Russia and more than $2.5 million for foreign placements.