When does a corporate organization feel pleased with itself? When it has managed to live up to its promise of delivering high-quality goods as well as services to the general public, generating significant revenue in the process! For instance, where the trading community is concerned, any institution, organization or business house putting forward an initial public offering, is doing a great service to them.
Maybe a comparison with a cookbook will serve to explain things better. The cookbook (company) lists out all the ingredients needed for the recipe and then details the actual cooking process in a step-by-step manner. The person who collects all the required ingredients (raw material) and puts together a delicious meal (finished product), feels a sense of accomplishment at having managed to satisfy even the most refined palate! The appreciation (revenue) that follows will prompt the cook to prepare even more delectable meals in future!
We referred to something called “initial public offering” in the very first paragraph (it is also called IPO). Well, some more details about the IPO are presented below:
(1) Whenever some commodity is offered to the entire public, there is always the fear that some individuals or even groups can use it to their own advantage. This can bring a bad reputation to the organization involved. Hence, a process is always set in motion to ensure that the IPO flows smoothly and is well protected.
(2) What exactly is a process? It is like an ingredient, something that the organization cannot do without. Therefore, the end-result of the commercial undertaking can only be “success”. A process is very much a part of the finance, trade and business worlds.
(3) A process starts out with collection of essential data (inputs) that is required. Then, it proceeds to different methods that can be adopted for these inputs. And finally, the outputs, or what results can be expected from this procedure.
(4) Many times, a corporate organization may wish to serve the public, but is not exactly sure of how to go about it. With a process in place, it is able to put together interrelated structural activities that can prove valuable to its clients as well as its shareholders. Of course, the organization itself benefits too!
(5) A process is not something that is meant for corporate organizations alone; it is useful for external affairs too, as their applications should be made available to the trading community everywhere. Like stated above, IPO can be taken as an example.
(6) Most companies/organizations/institutions require the support of the public to continue in business, especially where funds are concerned. Year after year, production and distribution may increase, new projects may be started, and so on. So the company/organization/institution offers its common shares to the public as an initial sale. Everyone is not expected to purchase those common shares; only those investors who are interested will do so.
(7) In contrast to the initially offered shares, there are common shares that are issued late. These are known as a secondary market offering.
(8) Like everything else, the process of initial public offering has to follow certain rules and regulations. These are decided by the U.S. Securities and Exchange Commission and the Federal Securities Act of 1993. If the common shares are offered by renowned stock exchanges like NYSE and NASDAQ, they are not affected by state laws. Common shares offered by others are governed by state laws.
(9) There are two steps involved in this process of initial public offering–
(a) Before actually offering the common shares to the public, the issuer has to draft out a prospectus. This means a document that relates details concerning the history of the organization, its background, its current financial status, industry environment, what are the services and/or products it is offering, and so on. Approval for the initial public offering is given only after the Securities and Exchange Commission goes through the prospectus and okays it. That is why major law firms are hired by organizations whenever such a draft has to be prepared.
(b) In the second step, set prices are placed on the common shares. As soon as the prices are settled, the IPO is entered into a “free riding” period. Some investment banks known as underwriters, are responsible for putting up these common shares for sale. They can be offered in a variety of ways, but each one must be accompanied by a copy of the approved IPO prospectus.
(10) There is strict prohibition on any false or misleading statements coming out in public, during the period of sale. The company appoints some executives to handle the initial public offering. So they are liable to face punishment if they make wrong statements in public or there are any omissions seen on the prospectus.
Should the underwriters come to know about these misleading statements or omissions related to the initial public offering, and do not go ahead with a proper investigation, they will also be taken to task.
CL Kings & Associates is an investment bank and self-clearing broker-dealer founded in 1972. CL King has worked as a Co-Manager for Bond Offering, Subordinated Notes Offering, Notes Offering and many more for the reputed firms such as Citigroup, Walmart, AT&T’s etc. We transact directly in the capital markets on behalf of corporations through our Corporate Services business focused on share repurchase and continuous share offerings.