Types of Offer - CH4

Question 1

What is an IPO?

Answer 1

Offering private shares to the public for the first time.

Question 2

Why do firms IPO?

Answer 2

• Raises equity capital.
• Greater publicity.
• Equity is not encumbered like debt capital.

Question 3

What is the Structure of an IPO?

Answer 3

Base number of shares + greenshoe.

Question 4

What is a Greenshoe?

Answer 4

An option to add a pre-agreed maximum number of shares to the IPO.

Question 5

What are the Stages of an IPO?

Answer 5

• Decision to IPO.
• Preparation of the prospectus - outlines the terms of the IPO.
• Sale of securities - IB team or syndicate of co-managers leads the sale of securities to the clients.

Question 6

What are the 3 ways to IPO?

Answer 6

• Placing.
• Introduction.
• Offer for sale.

Question 7

What is Underwriting?

Answer 7

Financial Institutions agree to purchase shares if there is insufficient demand.

Question 8

What is Best Efforts Underwriting?

Answer 8

IB does their best to sell all the shares, however cannot guarantee that it will. This means they’re not obliged to purchase the remaining shares if not all of them sell in case of monetary loss.

Question 9

What is the Issue with Best Efforts Underwriting?

Answer 9

Harms the reputation of the underwriter if they don’t purchase the shares.

Question 10

What’s a Follow-On Offering?

Answer 10

Another offering for already listed securities wishing to raise more capital.

Question 11

When do Follow-On Offerings take place?

Answer 11

When markets are robust. Not during bear markets in case demand is insufficient.

Question 12

What is the Underwriting like for Follow-On Offerings?

Answer 12

• Underwritten by IBs (no responsibility on the IB if not all shares are sold in adverse market conditions).
• Best efforts for stock brokers and other FIs (and high risk securities).