When a privately held company wants to offer their shares to the general public, they will complete an IPO which stands for an Initial Public Offering. This is the first time shares will be able to be purchased on a stock exchange. There a few different methods they can use to achieve this. Setting the price for an IPO is done either at a fixed price or book building auction. The fixed price offering is as intuitive as it sounds. The company will select an investment bank to advise on the process and handle underwriting procedures such as due diligence and regulatory filings. The investment bank will also gauge public interest and assess company risk to help determine a fixed offering price. In this format investors are aware of the price prior to the business entering the public market. The investor will purchase the shares at the fixed price when signing on to the IPO. One thing to keep in mind is the price the shares trade on opening day does not necessarily mean that was the IPO price. Subscribers could buy the shares at one price while opening trade day could see a higher or lower price. For example when Facebook went public in December of 2011 their IPO share price was $38 but opened at $45. With the book building issue the will set a trading range band, determining a floor and ceiling at which the stock may trade. The firm will announce how many shares they will offer to the public. The range and shares available gives bidders an idea of what they want to pay and how many shares they want. Once bidding has finished the business will determine the final price.
The traditional way to bring a company’s shares to the public has largely been described above. Hiring an investment bank to do roadshows, promote the shares, prepare legal documents among other things is the first step. The bank will file the appropriate documents with the Canadian Securities Administration in Canada or the Securities and Exchange Commission down in the US depending on where it wants to list. The process itself will takes months and possible years to finish. Once the company has filed for registration there is a “quiet” period. During this period when IPO information release is limited, the company is still allowed to communicate about other matters, including related business operations. Once the firm receives approval from the regulator, it may begin trading on an exchange.
Special Purpose Acquisition Companies have become increasingly popular over the last few years. The purpose of a SPAC is to raise capital in order to take a business public. Essentially a SPAC is a shell company waiting on capital to take an operating company to the masses. Investors will give money to a fund manager which will in turn use it to buy a business that is currently private, taking it public. Sometimes the manager will be clear on which type of business the shell company will look to take public but often investors are unaware of which business their funds will be used to bring public. This is why SPACs are often nicknamed “blank check” companies. The advantage to SPACs is since the shell company has limited to no operations merging with a private firm is typically faster and more cost effective. The drawback is the investor is putting a lot of faith in the fund manager to buy a viable business with long term growth potential. Also finding the business can take months, all the while investors’ money is sitting idle. Forbes is an example that went public through a SPAC. In August of 2021 Magnum Opus Acquisition merged with Forbes to list on the New York Stock Exchange.
This method is nearly identical to a SPAC however in this scenario the private company is the one purchasing the shell company.
A direct listing of shares removes the investment bank from the equation. It’s a somewhat new strategy to bring shares to an exchange. Existing shareholders of the business, like employees or early investors offer their shares to be listed directly on an exchange. When the big day to list arrives, shares of the business are available to be purchased and sold on the designated exchange by any investor and the price discovery happens through the transaction orders on the exchange. Direct listings are best suited for well known companies with a loyal customer base. This is because there is no investment bank raising awareness for the stock. One attraction to direct listings is the money saved by not hiring an investment bank. Existing shareholders are also not diluted because new shares are not being created as they would be through the conventional IPO.
Occasionally private or public companies will separate a segment of their business and trade that entity on a public exchange. The process would be similar to a convention listing although likely quicker than taking an entire business public. This is because the segment would not have as long as a history as the parent company. Generally, a company will do this if the particular division of the whole business is targeting a new market or offering a different service. Recent examples of this is Daimler spinning off their trucking business and then renaming the ticker as Mercedes. Another is AT&T spinning off Warner Brothers into its own entity.