Public Offerings

Initial Public Offering (IPO)

Initial Public Offerings (IPO)
Before an IPO, a company is considered private. As a pre-IPO private company, the business has grown with a relatively small number of shareholders including early investors like the founders, family, and friends along with professional investors such as venture capitalists or angel investors.

Typically, privately owned companies’ stage of growth occurs when a company has reached a private valuation of approximately $1 billion, also known as unicorn status. However, private companies at various valuations with strong fundamentals and proven profitability potential can also qualify for an IPO, depending on the market competition and their ability to meet listing requirements.

An initial public offering (IPO) is the first time a private company issues corporate stock to the public. Younger companies seeking capital to expand often issue IPOs, along with large, established privately owned companies looking to become publicly traded as part of a liquidity event. The issuing company and the investment bankers handling the transaction predetermine an offering price that the issue will be sold.
The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the offering.
Pricing is based on a company’s earnings and its potential earnings; otherwise, investors could buy worthless stock leading to a scam. The SEC would not find pricing to be illegal because of a lack of fraudulent intent.

Meme stock

A meme stock is a stock that gains popularity among retail investors through social media. The popularity of meme stocks is generally based on internet memes shared among traders, on platforms such as Reddit’s r/wallstreetbets. Investors in such stocks are often young and inexperienced investors. As a result of their popularity, meme stocks often trade at prices that are above their estimated value – based on fundamental analysis,[7][8] and are known for being extremely speculative and volatile.

HISTORY

Interest in meme stocks started in 2020,[4] in what the U.S. Securities and Exchange Commission has called a “meme stock phenomenon”.[12] The stock of American video game retailer GameStop has been one of the most popular meme stocks,[13][14] with mass purchases of the stock leading to a short squeeze on GameStop in early 2021.[5] The stock of entertainment company AMC is also cited as a prominent example.[15][14] Other examples include the stocks of Bed, Bath & Beyond, National Beverage, and Koss.[16] The distinction between a meme stock and a non-meme stock is not always clear; for example, Tesla has some of the characteristics of a meme stock: a high price-earnings ratio and being frequently discussed by amateur retail traders on social media, yet some professional analysts do not consider it to be overpriced.[17]

Interest in meme stocks is associated with trading platform Robinhood, which pioneered[18] commission-free trading.[19] According to The New York Times, “Robinhood was the tool of choice for traders in the original meme stocks”.[20]

Some meme stocks have often become popular among retail investors after being targeted by short-selling professional investors, such as hedge funds,[21][22][23] with participants having the explicit aim of causing losses among those firms.[21][23] News coverage has described the choice to purchase such stocks as an act of rebellion intended to humble short-selling professional investors.[24]

According to an SEC report, while some hedge funds had big losses, the meme stocks phenomenon did not widely impact hedge funds.[25][26] The SEC staff report also stated, “some investors that had been invested in the target stocks prior to the market events benefitted unexpectedly from the price rises, while others, including quantitative and high-frequency hedge funds, joined the market rally to trade profitably.”[26] By June 2021, according to Financial Times, some hedge funds were systematically analyzing meme stocks.[27]

Buying/Selling IPO shares
For ordinary investors, you can buy and sell IPO shares at any point, including throughout the first day of trading. Insiders, however, are subject to lock-up periods whereby they cannot sell their shares until a certain amount of time (usually several months to more than a year) has passed.
Public Offerings
A secondary offering is when a company that has already made an initial public offering (IPO) issues a new set of corporate shares or bonds to the public.  The capital raised may be intended to cover operational shortfalls, fund business expansion, or make strategic investments. Two types of secondary offerings exist: the first is a non-dilutive secondary offering, and the second is a dilutive secondary offering.
In a non-dilutive secondary offering, a company commences a sale of securities in which one or more of its major stockholders sell all or a large portion of their holdings. The proceeds from this sale are paid to the selling stockholders. A dilutive secondary offering involves creating new shares and offering them for public sale.
Security Exchange Commission (SEC)

The federal securities laws empower the Securities and Exchange Commission (SEC) with broad authority over all aspects of the securities industry. The SEC’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

The SEC has up to five Commissioners appointed by the President on the advice and consent of the Senate. No more than three Commissioners can be members of the same political party. 

The SEC must approve all registrations for public offerings of corporate securities in the United States. An investment underwriter usually manages or facilitates public offerings. A public offering is when an issuer, such as a firm, offers securities such as bonds or equity shares to investors in the open market.

The SEC’s enforcement actions resulted in $6.4 billion in fines and money ordered to be reimbursed to investors, up from just $3.9 billion in 2021, according to an annual report. “We don’t expect to break these records and set new ones each year because we expect behaviors to change.

The Laws That Govern the Securities Industry

Note: Except as otherwise noted, the links to the securities laws below are from Statute Compilations maintained by the Office of the Legislative Counsel, U.S. House of Representatives. These links are provided for the user’s convenience and may not reflect all recent amendments. Users may also want to consult the U.S. Code by referencing the Popular Name Table. For questions concerning the meaning or application of a particular law, please consult with an attorney who specializes in securities law.

Underwriting

Due Diligence

IPO shares of a company are priced through underwriting due diligence. When a company goes public, the previously owned private share ownership converts to public ownership, and the existing private shareholders’ shares become worth the public trading price. Share underwriting can also include special provisions for private to public share ownership.

KEY TAKEAWAYS

  • An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. 
  • Companies must meet requirements by exchanges and the Securities and Exchange Commission (SEC) to hold an IPO.
  • IPOs provide companies with an opportunity to obtain capital by offering shares through the primary market.
  • Companies hire investment banks to market, gauge demand set the IPO price and date, and more.
  • An IPO can be seen as an exit strategy for the company’s founders and early investors, realizing the full profit from their private investment.

References: Investopedia

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