Initial Public Offer (IPO) Method

Initial Public Offer (IPO) Method

The public issue made by a corporate entity for the first time in its life is called Initial public Offer (IPO), Under this method of marketing, securities are issue to successful applicants on the basis of the orders placed by them, through their brokers.

When a company whose stock is not publicly traded wants to offer that stock to the general public, it takes the form of Initial public offer . The job of selling the stock is entrusted to a popular intermediary, the underwriter. The underwriters charge a fee for their services.

Stocks are issued to the underwriter after the issue of prospectus which provides details of financial and business information as regards the issuer.

The issuer and the underwriting syndicate jointly determine the price of a new issue. IPO stock at the release price is usually not available to most of the public. Good relationship between, the broker and the investor is a pre-requisite for the stock being acquired.

Full disclosure of all material information in connection with the offering of new securities must be made as part of the new offerings. A statement and preliminary prospectus (also known as a red herring) containing the following information is to be filled with the Registrar of Companies:

1.     A description of the issuer  s business.

2.     The names and addresses of the Key company officers, with salary and a 5 year business history on each.

3.     The amount of ownership of the key officers

4.     Any legal proceedings that the company is involved in

The essential steps involved in this method of marketing of securities are as follows:

1.     Order: Broker receives order from the client and places orders on behalf of the client with the issuer.

2.     Share Allocation: The issuer finalizes share allocation and informs the broker regarding the same.

3.     The Client: The broker advises the successful clients of the share allocation. Clients then submit the application forms for shares and make payment to the issuer through the broker.

4.     Primary issue account: The issuer opens a separate escrow account (primary issue account) for the primary market issue. The clearing house of the exchange debits the primary issue account of the broker and credits the issuer s account.

5.     Certificates: Certificates are then delivered to investors. Otherwise depository account may be credited.