Initial public offering
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In financial markets, an initial public offering (IPO) is the first sale of a company's common shares to public investors. The company will usually issue only primary shares, but may also sell secondary shares. Typically, a company will hire an investment banker to underwrite the offering and a corporate lawyer to assist in the drafting of the prospectus.
The sale of stock is regulated by authorities of financial supervision and where relevant by a stock exchange. It is usually a requirement that disclosure of the financial situation and prospects of a company be made to prospective investors.
The Federal Securities and Exchange Commission (SEC) regulates the securities markets of the United States and, by extension, the legal procedures governing IPOs. In India, this is governed by the Securities Exchange Board of India (SEBI). The law governing IPOs in the United States includes primarily the Securities Act of 1933, the regulations issued by the SEC, and the various state "Blue Sky Laws".
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Business cycle
In the United States, during the dot-com bubble of the late 1990s, many venture capital driven companies were started, and seeking to cash in on the bull market, quickly offered IPOs. Usually, the stock price spiraled upwards as soon as a company went public, as investors sought to get in at the ground-level of the next potential Microsoft.
Initial founders could often become overnight millionaires, and due to generous stock options, employees could make a great deal of money as well. The majority of IPOs could be found on the Nasdaq stock exchange, which is laden with companies related to computer and information technology. In India, majority of the IPO's get listed in the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).
This phenomenon was not limited to the U.S. In Japan, for example, a similar situation occurred. Some companies were operated in a similar way in that their only goal was to have an IPO. Some stock exchanges were set up for those companies, such as Nasdaq Japan.
Auction
A venture capitalist named Bill Hambrecht has attempted to devise a method that can reduce the inefficient process. He devised a way to issue shares through a dutch auction as an attempt to minimize the extreme underpricing that underwriters were nurturing. Underwriters however have not taken to this strategy very well. Though not the first company to use dutch auction, Google is one established company that went public through the use of auction (though its share price rose 17% in its first day of trading despite the auction method). Perception on IPOs can be controversial depending on one point of view. For those who view a successful IPO to be one that raised as much money as possible, the IPO was a total failure. For those who view a successful IPO from the kind of investors that eventually gained from the underpricing, the IPO was a complete success. This is because the auction closed with a knowledge that it was going to sell very close to the market price. This effectively would have discouraged speculators from bidding. When it later emerged that the stock was going to be way underpriced, Google never opened up the bidding which lead to the gain accruing to the long term investors.
Levels and flows
Global Initial Public Offerings reported by Thomson Financial ([1] (http://www.thomson.com/financial/investbank/fi_investbank_league_tablearchive_debt.jsp)) ($ billion) (number of companies)
- 2003: 55.115 (79) (Q4 2003 report)
- 2002: 64.039 (?) (Q4 2003 report)
- 2002 (US Issuers): 52,756.0 (116) (Q4 2002 report)
- 2001 (US Issuers): 38,272 (?) (Q4 2002 report)