by Dave Coker

Created on: June 22, 2008

IPO - AN EXCITING EVENT

IPO. Initial Public Offering. An IPO attracts attention. An IPO is exciting. They're stuff of the bold newspaper headlines during the trading day and envious pub talk late into the night. After all, anyone with an interest in the markets has heard the term, and maybe even known someone who has "gotten into" an IPO and profited immensely.

But the IPO is just the final, most public step in a carefully planned and time consuming process involving hundreds of people. So what happens before the very public event known as an IPO? How does a company "do" an IPO? What are the basics of an IPO?

To answer these questions let's first introduce the various parties involved in an IPO.

IPO - THE PARTICIPANTS

It all starts with the "issuer". Companies that issue stock in an IPO - the "issuer" - are almost always established businesses seeking to raise capital to fund expansion. There are many ways that an established businesses can acquire money for this purpose; retained earnings, private loans, bank loans, private stock sales, etc. Each approach to raising capital has it's own advantages and disadvantages that won't be discussed here.

When a company issues stock in the form of an IPO, management is selling part ownership of the enterprise to the public. A company that wants to sell stock to the public must enlist the services of an "underwriter", typically an investment bank. This step is necessary for many reasons, the most important of which are:

First, regulatory approval. For the protection of the general public, the Securities and Exchange Commission (SEC) in The United States will only allow approved firms to solicit the public for purposes of selling stock.

Second, expertise: The underwriter will have done stock offerings before, and will streamline the IPO process, guiding management of the issuing company through what will be a drawn out process. Mistakes made during the IPO process can be very, very expensive, so expertise is key.

Third, industry connections: The underwriter will organise the assistance of other banks and brokerages to help with the IPO. This group of banks and brokerages is known as a "syndicate". The underwriter who organizes the IPO is known as the "lead underwriter". Each member of the "syndicate, working with the lead underwriter, commit to purchasing a percentage of the issued shares, which are then sold onto the general public.

The fourth, and perhaps most important reason, is liquidity. As previously noted, the company

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