IPOs and Capital Raising
What is an IPO
An IPO is the abbreviation for “Initial Public Offering”.
It can also be known as “Initial Price Offering”
An Initial Price Offering (IPO) is where a company raises capital by offering existing or new shares in a company to the public for the first time (also known as a company Float) or otherwise known as “Going Public”.
An IPO allows a privately owned company to expand from a private company, to become listed on a stock exchange such as the Australian Stock Exchange (ASX).
To reinforce this: The main objective of taking a company to an IPO is to raise capital to expand its operations by offering existing shares or the offering of new shares in its company to the public for the first time.
By investing in an IPO, it will allow investors to purchase shares at a pre-set IPO price before the company begins trading on a stock exchange with the hope that the IPO shares that are on offer will increase in value in that company over time.
It’s important to note that there may be a set minimum or maximum amount of IPO shares that may be offered and purchased with any IPO offer.
There are many myths that many IPO offers are initially only offered to existing “High Net Clients” of participating affiliated investment firms, this is incorrect.
All IPOs are open to the general public despite the selective marketing efforts of the underwriting brokerage firm that is offering the IPO.
Benefits of IPOs
There are many benefits for both the public investors and the company offing the IPO
The main benefit of offering an IPO is for a company to raise money quickly via the means of the financial investment support from the public.
Advantages of investing in an IPO for the Public
The public stands the chance of getting into a stock while it’s at its potential low price. The IPO potentially offers investors the opportunity to make capital growth in the short term or preferably by a long term investment growth strategy.
Many investors look at purchasing an IPOs as if they are buying a property or a tangible investment object. Many believe that by investing in an IPO stock while it’s low with time the stock will increase in value with the growth of the company, in other words by getting in early this may help gain greater returns.
Advantages For The Company Offering The IPO
There are many advantages and benefits for a company to go public via an IPO.
Raising Quick Capital
The main benefit and reason as to why companies go public, is it enables the company to raise capital quickly in order to expand their operations in order to achieve their desired company growth.
The company may use these funds to expand their operations by allocating funds to its research and development departments, develop new technologies, hire more employees, expand on their infrastructure, reduce debt, acquire beneficial companies and fund capital expenditure as a whole.
The money raised with an IPO is designed to expand the growth and longevity of the company.
Company Recognition & Credibility
When a company goes public it also creates a greater public awareness about the company.
By creating a greater company awareness it often helps the company gain greater traction with their existing operations as well as gain the interest of further potential investors.
Once a company becomes a publicly listed company it also helps the company achieve a perceived level of stability. With this new perception the company may now be seen as a more prestigious company gaining more public and institutional support.
Reducing Costs & Increasing Employee benefits
When a company goes public, the management and employees of the company will often reduce their salaries and entitlements lowering the operational cost of the company (reducing Costs). Theses employees may be offered allocated shares in the company based on performance achievements, so in other words the lower the cost for the company the higher the share price will become that will in turn benefit the employees and the shareholders if the stock price should rise.
Risk of IPOs
Like most investments, investing in an IPO can be risky for an investor. It’s suggested that before you invest in an IPO you seek independent financial advice to see if the investment is suitable and meets your investment needs.
Limited Financial & Historical Data
Before a company goes public they are not required to have stringent financial public records and normally there is limited historical information about the company. This makes it harder for an investor to evaluate the companies true financial position and strengths of its operations prior to the official launch of the IPO.
Prediction of Stock Price
Like all stocks it’s difficult to predict what the companies stock price movements will be in the future. This due to there is no historical data to support what the public feels that the companies stock price is worth.
Many institutional investors that invested in the initial Pre-IPO may sell off their positions shortly after the IPO launch date for a quick profit. This may decrease the demand for the stock and cause a decrease in the stock price.
The Media can be a Friend or Foe when it comes to an IPO. Some media mediums may love the company and cause a demand for the stock to rise while and other media organisations may discourage the viability of the IPO. Political influences can also influence an IPO performance, we recommend that you consider the source and credibility of information before passing judgment on any IPO.
Risk of Missing Out of an Investment Opportunity
Many investors fear that they may miss out on an IPO opportunity. Some IPOs gain massive profits while others drop in value. all companies have the potential to increase and decrease in value.
Example: of successful Australian IPOs over the last few years is:
Afterpay Ltd (ASX code: APT). IPO listed at $2.70 within 37.5 months it was valued at $36.57 (that’s a 1254.44% increase).
Example: of an unsuccessful Australian IPOs over the last few years is:
Vonex Limited (ASX code: VN8). IPO listed at $0.20 within 12 months it was valued at $0.125 (that’s a -37.5% decrease).
while others drop in value. all companies have the potential to increase and decrease in value.
When you apply for an IPO there are many factors that are taken into consideration before any IPO shares are issued to any investor.
It is not guaranteed that you will receive your desired allotment of shares but it is guaranteed by the underwriting firm that your money that you have transferred is safe and secure while the IPO allocations are in progress.
If the IPO Over-Subscribed
If an IPO is oversubscribed (this is often looked as a good thing) then the underwriting firm may decide to allocate each investor a set percentage of the desired amount of shares based on the amount raised in the IPO offering.
For example if a company needed to raise 10 million dollars but the IPO raised 12 million dollars then the IPO is 20% oversubscribed.
The Underwriting firm may then allocate you 80% of the shares that you requested and transfer the other 20% of your funds back to your nominated bank account as listed on the IPO application form.
Alternatively the company may elect to accept the full amount of funds raised and allocate you the full amount of shares to you without diluting the overall company shares or value of the company by releasing more shares to the public.
If the IPO Under-Subscribed
If the IPO is under-subscribed it means that the company did not receive the full support of the public and did not raise the desired amount of capital in time to issue the IPO shares at the desired price as outlined in their company prospectus. If this happens the lead manager (the underwriting firm) will contact the company to determine what the best course of action will be.
In many cases the company may increase the time period required to raise more capital and continue with the IPO offering, refund the IPO subscribers, and plan an alternative date to list an IPO or agree to allocate the IPO shares at a lower price to maintain the investors.
Example: If the company needed to raise 10 million dollars and they only raised 9 million they may elect to give each of the IPO applicants another 10% of the shares at no extra cost to the investor.
What Is a Pre-IPO
Pre- IPO stands for “Pre-Initial Public Offering”.
How does a pre-IPO work
The purpose of a Pre-IPO is for the company to raise new capital prior to offering shares to the public via an official IPO.
A Pre-IPO is usually offered to larger institutions or Wholesale Investors (Sophisticated Investors) who are larger net worth Investors.
These larger investors are offered the opportunity to purchase larger groups of shares in the selected company at a discounted rate prior to the companies intention of being listed on the stock exchange.
Benefits of Investing in Pre-IPOs
For the Investors: When a Pre-IPO is offered, the company that is offering the Pre-IPO will offer the investors a significant discounted price for an agreed portion of shares in the company prior to the official launch of the IPO. The price offered will be lower than that what is estimated to be advertised in the companies IPO prospectus.
By investing in a Pre-IPO you also have the opportunity to get in at the proposed lowest point (ground Floor) this provides the investor with the opportunity to achieve potential higher growth in a short period of time and over an anticipated longer investment time period.
For the company offering the Pre-IPO: it will help the company with immediate cash flow and reduce financial risks prior to the official IPO offer.
Disadvantages of a Pre-IPO
For the investors: It is widely assumed that the discounted Pre-IPO price offered will be issued at a lower price compared to the price that will be offered to the public, this is not always the case, as the company that issues the shares in a Pre-IPO offer does not have to issue any guarantee that the price is guaranteed to be at a lower price. It is only when an IPO is listed that the actual share Price is determined once it’s listed on the stock market.
For the company: A company does not want to dispose of all of its available shares in a Pre-IPO agreement as it may lead to those Pre-IPO investors to start selling their Pre-IPO issued shares immediately once the company has been listed on the stock exchange at a higher price.
To protect the companies share price, it is common for companies to protect themselves by having the Pre-IPO investor to agree to hold the company stocks for a certain time period and or have the investor to agree that selling off shares must be in smaller parcels over a period of time to avoid large sell-offs affecting the market price of that company.
What is Capital Raising
Capital raising is the term used for when a company needs to raise funds to continue its operation, expand its operations, or pay off debts.
A company does not have to be a publicly listed company to raise capital.
Any company (private or public) are entitled to raise capital via a capital raising offer.
To raise capital, the company must be able to offer the investors (people or institutions) with an incentive that’s attractive enough for investors to offer their funds in the capital raising exercise.
It’s up to the company to decide who they offer the capital raising opportunity to. Some companies prefer to offer the capital raising opportunity to existing shareholders while other companies may offer the capital raising opportunity to new investors (the general public).
Ways to Raise Funds
Pro-Rata entitlement offers
The most common way for companies to raise funds is by offering existing shareholders a Pro-Rata entitlement offers.
A Pro-Rata entitlement offer is where existing shareholders are entitled to purchase additional shares at a significant discount based on the amount of share they currently own.
For example: If the company stated that an existing investor can purchase 1 additional share for every 10 shares that they currently own and the investor already owned 100 shares, then the investor would be entitled to purchase 10 additional shares at the discounted share price.
Share Purchase Plan
Another common offer that is used to raise capital is by implementing a Share Purchase Plan. This is where a company will offer a pre-determined amount of shares in its company to the public for the exchange of funds raised. It is common that the company may restrict the number of shares that are available per investor.
This is where a company will approach brokerage firms or investment company’s and offer the amount of shares available to larger investors. By offering an institutional offer the capital raising exercise will normally be a lot quicker process for the company however the company may have to pay the brokerage firm a fee and lower the offered stock price in negotiations.
Venture Capital Funding
Companies may also seek funding from venture capital firms that manage the funds of their investors. A venture capitalist company will negotiate with the company seeking the Capital raise and negotiate terms that suit both the venture capitalists and the company. This is normally the last resort for a company as the venture capital firms will normally offer extremely low share price offer to the company with the intention of seeking a higher return for its investors.
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