In 2021, more than 440 companies entered the US stock exchanges through the IPO procedure, SPAC is not taken into account in this number. Only 38% of these company’s shares are trading this year at prices higher than the placement prices. The most impressive amount of funds in the framework of the IPO attracted the manufacturer of electric vehicles Rivian Automotive — almost $ 12 billion.
Obtaining funds for the further development is the main goal pursued by companies when they decide to issue shares for public sale. However, in order for market participants to be ready to invest in a project, it is not enough to have an attractive business idea and a good business reputation. The company’s management will have to do a lot of work to prove to the general public the competence of its team and demonstrate the readiness of the business for further growth.
How is the business preparing for the initial issue of shares? Let’s puzzle out the procedure step by step.
The process of IPO — the Initial Public Offering of shares, for the acquisition of an unlimited number of persons, is usually divided into several stages.
The longest phase can take from six months to three years. Such time is required for companies to audit the business and bring its key parameters in line with the requirements of the regulator.
The preliminary stage requires the involvement of many experts: lawyers, auditors, accountants, marketers, financial and information specialists. Managers with experience in preparing companies for IPO can be invited to the project team.
The result of the stage should be the decision of the management team to enter the IPO or choose another way to raise funds. If the choice is in favor of an IPO, the company attracts underwriters and proceeds to the next steps.
Veligera Capital Fund prefers to select companies for Pre-IPO investments that are at an early stage of preparation, when the upcoming entry into the stock exchange has not yet become known to the general public. This approach allows you to avoid hype in the market and get a fair, profitable for investors, stock price.
At the preparatory stage, one of the main roles belongs to the underwriter. As a rule, this is an investment bank or an insurance company. Usually several underwriters work on an IPO. They help to assess the risks and choose the appropriate strategy.
The company and the underwriters face the following tasks:
As part of the main stage, preliminary applications for the purchase of shares are being collected. Based on them, the underwriter concludes how many shares and at what price investors are willing to buy. Large buyers will have the opportunity to purchase shares before the start of trading. The underwriter himself has the preemptive right to repurchase shares, after the placement of shares, he can resell them.
If the demand for shares exceeds the supply, the underwriter and the company’s management decide what to do:
Only after the shares are distributed according to the preliminary bids, the auction opens.
The final stage of the IPO is listing — the beginning of the circulation of shares on the stock exchange.
For investors who do not plan to remain among the shareholders for a long time after the IPO, it is important to know about the presence or absence of a lock-up period. This parameter is determined by the issuer itself. During the lock-up period, which lasts from 3 to 6 months, Pre-IPO investors, owners and management of the company cannot sell their shares. Such measures are taken to prevent large investors from significantly influencing the market, for example, flooding it with stocks.
Every year it becomes more difficult to earn income directly at the time of the companies’ entry into the stock exchange. In 2021, according to NASDAQ, on average, on the first day of trading, shares grew by 34%, in a third of cases, at the end of the first day, shares were sold below the placement price.
Pre-IPO investors are less concerned about price changes on the stock exchange during the initial trading days. It is much more profitable to enter a fast-growing company a step or two earlier: before the announcement of the IPO or even at the previous round of financing. When the investment goal and the time of entry into the project are chosen correctly, by the beginning of trading, the company’s valuation will already increase by a multiple, and minor fluctuations on the stock exchange will not have a significant impact on the income of Pre-IPO investors.