Sep
11
2023
What is IPO Subscription Status?

What Is IPO Subscription Status?

By | Growing Wealth, invest, Investing | Comments Off on What Is IPO Subscription Status?

An IPO subscription status describes the position of a company’s initial public offering (or IPO), as it relates to how many committed investors it has prior to the actual IPO.

For example, an IPO may be “fully subscribed,” “undersubscribed,” or “oversubscribed.”

Many investors are intrigued by IPOs, because it’s an opportunity to put money into a relatively early-stage company that has room to grow over time. Some companies draw more investor interest than others, and the IPO’s subscription status is one way to gauge that, because investors sign up with the intent to purchase a certain number of shares.

A company’s IPO subscription status doesn’t guarantee that the stock will perform one way or another. It’s just a preliminary indicator that may help interested investors navigate a potentially risky investment move.

Key Points

•   An IPO subscription status describes the position of a company’s initial public offering (IPO) with respect to how many committed investors it has before the actual IPO.

•   An IPO is when a company offers shares for sale to members of the general public through a stock exchange.

•   Knowing an IPO’s subscription status can give investors an indication of how much demand there is for shares, and how an IPO stock may perform once it hits the exchanges.

•   Typically, only certain investors can participate in IPO bidding and subscribe to an IPO.

•   Individual investors may not have access to IPO subscriptions in the U.S., but research can help them find the right companies to invest in as they go public.

IPO Review

“IPO” is an acronym that stands for “initial public offering.” It represents the first time that a company offers shares for sale to members of the general public through a stock exchange. Prior to an IPO, you would not be able to find a company’s stock trading on an exchange such as the New York Stock Exchange, for example.

Prior to going through the IPO process, a company is private, and its investors usually include its founders, employees, and venture capitalists. A private company usually decides to go public to attract additional investment.

But it’s the tricky period before an IPO, when a company is still private, that many prospective investors look to make a move and get in early. This is when investors “subscribe” to an IPO, which means they’re agreeing or signaling their intent to buy a company’s stock prior to its IPO.

When the IPO executes, those investors may be able to purchase the number of shares to which they previously agreed. Typically, only certain investors can participate in IPO bidding and subscribe to an IPO.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

IPO Subscription Status Defined

A company’s IPO subscription status refers to how investors have subscribed to a public issue. The goal of an IPO is to sell all of its shares — or, to reach an IPO subscription status of fully subscribed, and a valuation in line with its calculations for pricing its IPO.

In that event, all of a company’s shares are spoken for prior to hitting the exchanges, and any leftover shares won’t see their values reduced in order to attract buyers. Early investors looking to cash out after an IPO typically must wait for the lock-up period to expire before they can sell their shares.

Keep in mind that many IPO stocks in the U.S. are gobbled up by large, institutional investors involved with the IPO’s underwriter. But although the average retail investor is not typically included in an IPO roadshow, they may still be able to buy an IPO stock at its offering price.

Some brokerages have programs that allow qualified investors to request IPO stocks at their offering price, but there’s no guarantee those investors will actually get the shares.

Why IPO Subscription Status Matters

An IPO’s subscription status matters in that it can provide investors a sense of how an IPO stock may perform once it hits the exchanges. That’s pretty important, especially for traders or investors who are looking to earn a profit flipping IPO stocks.

Shows Demand of IPO Shares

Knowing an IPO’s subscription status can give investors an inkling as to how much demand there is for shares — if demand is high (an IPO is fully or oversubscribed), it’s a signal that an IPO stock may gain value after its market debut. But it’s not a guarantee.

Conversely, an undersubscribed IPO sends a signal that investors aren’t that interested. And when stocks do hit the exchanges, they may see a price reduction soon thereafter.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

The Takeaway

While individual investors may not have access to IPO subscriptions in the United States, you can still participate in the IPO market. The key is doing your research to find the right companies to invest in as they go public.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How many times can an IPO be oversubscribed?

IPOs get oversubscribed frequently, which means that more investors want to buy shares than a company has available to issue. There isn’t really a limit as to how many times it can be oversubscribed, but depending on the category of investor, it’s not uncommon for IPOs to be oversubscribed dozens or even hundreds of times.

What is an IPO subscription rate?

IPO subscription rates are an estimate of how many bids are received for each investor category, divided by the number of shares allotted for each category by the company. This helps determine the level of participation among investors in each category.

Photo credit: iStock/SeventyFour

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Sep
11
2023
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Navigating the IPO Lock-up Period

By | Growing Wealth, invest, Investing | No Comments

Following an initial public offering, or IPO, many companies and investment bankers will tie your stock up in a lock-up period to stop you from cashing out too quickly and help keep the share price steady.

That may be frustrating if you’re an early employee and investor in a company that’s about to go public, as you may be expecting the value of your stock to skyrocket after the initial public offering, and were hoping to sell some shares. But lock-up periods serve a purpose, and stakeholders will need to know how to navigate them.

Key Points

•   An IPO lock-up period is a period after a company goes public during which some early employees and investors aren’t allowed to sell their shares.

•   Companies or investment banks self-impose the lock-up period contractually, usually lasting between 90 and 180 days.

•   The purpose of the lock-up period is to stop early investors from cashing out too quickly and maintain a steady share price.

•   Companies may also use the lock-up period to avoid flooding the market with shares and to prevent insider trading.

•   Regular investors may want to pay attention to the lock-up period when investing in IPOs, as it can affect the risk of investing in the company.

What Is an IPO Lock-up Period?

As a part of the IPO process, the IPO lock-up period is the length of time after a company goes public, during which some early employees or investors in the company aren’t allowed to sell their shares.

These restrictions are not mandated by the Securities and Exchange Commission (SEC), but rather are self-imposed contractually by companies or the investment banks that were hired to advise and manage the IPO process.

Lock-periods can be any length of time, but usually they’re between 90 and 180 days after the IPO. Companies may also decide to have multiple lock-up periods that end on different dates and allow different groups of people to sell their shares at different times.

How the IPO Lock-Up Period Works

Here’s an example of an IPO lock-up period: When one lock-up period ends company executives might be allowed to sell their shares, while a subsequent lock-up ending means regular employees can sell their shares.

What Does “Going Public” Mean?

When a company has an IPO, it is offering shares of the company for sale to the public stock market for the first time. The company is shifting at this point from a privately held company to a publicly traded company. This is the origin of the phrase “going public,” which you may have heard bandied around in reference to IPOs.

When a company is private, ownership is limited and can be tightly controlled. But when a company goes public, anyone can buy shares. But at this point there may be a lot of fingers in the pie already. Company founders, early employees, and even venture capitalists may already own shares or have stock options in the company.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

What Is IPO Underwriting?

Before a company goes public it often goes through an underwriting process in which an underwriter — usually an investment bank — advises the IPO process and helps come up with the business’ valuation. The most common way they do this is by agreeing to buy a company’s entire inventory of stock.

Then to alleviate the risk of holding all of this stock, the underwriter will allocate shares of the company to institutional investors before the IPO.

The underwriter will try to drum up so much interest in the stock that more people will want it than there are shares available. This will lead to the stock being oversubscribed, which will hopefully support its price when it hits the market.

Recommended: What Sets IPO Valuations

How IPO Lock-ups Get Used

A company or its underwriters might use the lock-up period as another tool to bolster the share price during the IPO.

Shares held by the investment bank or institutional investors can be sold during an initial public offering, but the shares held by company insiders — including founders, executives, employees, and venture capitalists — may be subject to a lock-up period.

With Silicon Valley tech startups in particular, a greater proportion of compensation may be paid out with equity options or restricted trading units. In order to avoid flooding the market with shares when employees exercise these contracts, the lock-ups restrictions mean that these shareholders are not able to sell their stock until this period is over.

Recommended: Guide to Tech IPOs

What Is the Purpose of a Lock-up Period?

Ensuring Share-Price Stability

Insiders, like employees and angel investors, can potentially own far more shares in a company than are initially available to the general public. The last thing a company wants during an IPO is to have these extra shares flood the market.

Since share price is set by supply and demand, extra shares can drive down the price of the stock. And that’s not a good look, especially when a company is trying to impress investors and raise capital.

Avoiding Insider Trading

Company insiders may face other restrictions beyond the lock-up period. That’s because they might have information that can help them predict how their own stock might do that is not available to the general public.

Though insider trading can be legal if properly controlled and documented, it is not legal when based on information the public doesn’t have yet. So, depending on when a lock-up period ends, company insiders may have to wait extra time before selling their shares.

For example, if a company is about to report its earnings around the same time a lock-up period is set to end, insiders may have to wait for that information to be public before they can sell any shares.

Public Image

Finally, lock-up periods can be a way for companies to keep up appearances. When those closest to the company hold their shares, it can signal to investors that they have confidence in the strength of the company.

If company insiders start to dump their stock, investors may get suspicious and be tempted to sell their shares as well. As demand falls, the price of the stock usually does, too.

Even if the insiders were trying to cash in their stocks for no other reason than simply wanting the money, public perceptions may change and damage the company’s reputation. The lock-up period may have an effect by keeping this from happening — at least while the newly public company gets off its feet.


💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

What’s an Example of a Lock-up Period?

For example, let’s say Business X — a unicorn company — went public with an IPO in March 2022. The company used a system of multiple lock-ups with different expiration dates. The first lock-up expired in July 2022, and allowed early investors and insiders to sell up to 400 million shares of the company.

As new shares hit the market the stock dropped by as much as 5%, and it closed the day down just over 1%. A second lock-up expired in August 2022, allowing regular employees to sell their pre-IPO shares in the company. When this lock-up ended, employees were allowed to sell more than 780 million shares of Business X on the open market.

What Does the Lock-up Period Mean for Employees with Stock Options?

Restrictions imposed during a lock-up period usually apply to any stock options someone has been given as an employee before an IPO. Stock options are essentially an agreement with a company that allows its employees to buy stock in the company at a predetermined price.

The thinking behind this type of compensation is that the company is trying to align employees’ incentives with its own. Theoretically, by giving employees stock options, the employees will have an interest in seeing the company do well and increase in value.

There’s usually a vesting period before employees can exercise their stock options, during which the value of the stock can increase. At the end of the vesting period, employees are able to exercise their options, sell the stock, and keep the profits.

It’s possible that the company will issue stock options before it goes public. If stock options vest before the IPO, employees may have to wait until after the lock-up period to exercise their options. However, stocks may not vest until after the lock-up period, in which case the restrictions don’t have much bearing on the employee’s ability to exercise their stock options.

How Does the IPO Lock-Up Period Affect Investors?

When buying IPO stocks as a regular investor, you likely don’t have access to shares of a company before it goes public. Even so, you still might want to pay attention to the lock-up period. Investing in IPOs can be tricky and are generally considered risky.

The underwriters will probably do everything they can to make sure that stock prices go up when company shares hit the market. But in the end, no one really knows what will happen during an IPO.

Reading the IPO Prospectus

What’s more, investors interested in buying a stock that’s about to go public don’t really have much information to go on to help them figure out what kind of value they’re getting. When they’re private, companies don’t have to divulge very much information about their inner workings to the SEC.

However, before going public they will make documents available, including the Form S-1 and the red herring prospectus that can give investors some clues about a company’s business model and what they plan to do with the money they raise. Investors can also look at what happened when similar companies went public and whether they did well.

Waiting to Buy Until After Lock-ups End

This is all to say that with little idea of what a company’s stock will do when the company goes public, regular investors may want to hold off before they invest. Investors may even want to hold off until the lock-up period is over.

When the lock-up ends and insiders and employees can finally sell their shares, the stock price may experience some volatility as the new shares enter the market, potentially causing drops in a stock’s price.

Some investors may try to take advantage of the dip that can occur when a lock-up period ends. For example, if investors see that a company’s financial health is good during the first stages of its public life, they may use the expiration of the lock-up period as a chance to buy shares at a “discount.”

They may feel that if the stock’s fundamentals were good before the lock-up ended, the company is in good financial health and the stock should rebound. Timing the market, however, isn’t necessarily a good idea for all investors, especially those not used to taking a deep dive into the fundamentals of a company’s financials. It’s also not guaranteed to produce good results.

The Takeaway

Lock-up periods are agreed-upon periods between early investors and employees of a company and underwriting investment bankers during which selling of shares is prohibited. Having such stakeholders hold off on selling their shares can help the stock price of a newly public company stay more stable.

An initial public offering’s lock-up period can be hard to navigate. Yet, they can be really exciting for investors looking to get in on the ground floor and employees or insiders looking to cash in on their shares or stock options.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0523116

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Sep
11
2023
What is an IPO Underwriter? What Do Underwriters Do?

What Is an IPO Underwriter and What Do They Do?

By | Growing Wealth, invest, Investing | Comments Off on What Is an IPO Underwriter and What Do They Do?

An initial public offering (IPO) underwriter is typically a large investment bank that works closely with a company to issue stock on the public markets. They are almost always IPO specialists who work for an investment bank.

Underwriters can also be financial professionals that evaluate risk and then determine a price for financial transactions such as purchasing an insurance policy or taking out a mortgage.

In the world of equities, underwriters work with private companies to value their operations, connect with potential investors, and issue stock on a public exchange for the first time.

Key Points

•   An IPO underwriter is typically a large investment bank that works closely with a company to issue stock on the public markets.

•   An underwriter helps create the market for the stock by contacting potential investors and setting the IPO price.

•   IPO underwriters need a Bachelor’s degree, but it helps to have certain other skills and experience in economics and math.

•   The IPO underwriting process takes as little as six months from start to finish.

•   The underwriter’s stabilization responsibilities only last for a short period.

What Is an IPO Underwriter?

Stock underwriters guide the company that’s issuing stock through the IPO process, making sure they satisfy all of the regulatory requirements imposed by the Securities and Exchange Commission (SEC), as well as the rules imposed by the exchange, such as the Nasdaq or the New York stock Exchange (NYSE).

Recommended: What Is an IPO?

Role and Benefits of an IPO Underwriter

Aside from the fact that an underwriter is required during the IPO process, there are many benefits to this role. An IPO’s underwriter helps create the market for the stock by contacting a wide range of institutional investors, including mutual funds, insurance companies, pension funds and more.

Key Functions of an IPO Underwriter

They first reach out to this network of investors to gauge their interest in the company’s stock, and to see what those investors might be willing to pay. The underwriter uses those conversations to set the price of the IPO.

From there, the underwriter of an IPO works with the company issuing the stock through the many steps that lead up to its IPO. On the day of the IPO, the underwriter is responsible for purchasing any unsold shares at the price it set for the IPO.

The way that IPO underwriters get paid depends on the structure of the deal. Typically, IPO underwriters buy the entire IPO issue and then resell the stocks, keeping any profits, though in some cases they receive a flat fee for their services.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

What Is IPO Underwriting?

An IPO is the process through which a private company “goes public”, and has its shares sold to regular investors on a public market. The company issuing stock works with the IPO underwriters throughout the process to determine how to price their stock and stir interest among potential investors.

Most companies find their way to the investing public through a group of underwriters who agree to purchase the shares, and then sell them to investors. But only a few broker-dealers belong to this “underwriting syndicate,” and some of them sell exclusively to institutional investors.

What Does an IPO Underwriter Do?

In essence, an underwriter in an IPO is the intermediary between a company’s executives and owners, such as venture capitalists, seeking to issue shares of stock and public-market investors.

When a company seeks funding from the capital markets, it must make dozens of decisions. How much money does the company want to raise? How much ownership will it cede to shareholders? What type of securities should it issue? Those are just a few, including what kind of relationship the company wants to have with its underwriter.

Underwriting agreements take different forms, but in the most common agreement, the underwriter agrees to purchase all the stock issued in the IPO, and sell those shares to the public at the price that the company and the underwriter mutually agree to. In this agreement, the underwriter assumes the risk that people won’t buy the company’s stock.

Sometimes a company works with a group of underwriters, who assume the risk, and help the company work through the many steps toward an IPO. This involves issuing an S-1 statement. This is the registration form that any company needs to file with the SEC to issue new securities.

The S-1 statement is how companies introduce themselves to the investing public. S-1 requires companies to lay out plans for the money they hope to raise. The IPO underwriter also creates a draft prospectus for would-be investors.


💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

What Qualifications Does an IPO Underwriter Need?

Underwriters work in many roles across the finance sphere. You could be a mortgage underwriter, assessing the creditworthiness of certain borrowers. You could work in the insurance industry. Becoming an IPO underwriter, and bringing private companies into the public marketplace, requires understanding how businesses work, and how the equity markets function.

At minimum an IPO underwriter needs a Bachelor’s degree, but it helps to have certain other skills and experience. For example, would-be underwriters might consider a background in economics as well as math. Underwriters generally need good analytical, communication, and computer skills.

Educational and Professional Requirements

There are a number of certifications that apply in the underwriting field in general, but there isn’t a specific designation for IPO underwriters. It’s more common for someone who wants to work with IPOs to get their Masters in business administration (MBA), and from there to work at an investment bank.

The IPO Underwriting Process

Underwriting an IPO can take as little as six months from start to finish, though it often takes more than a year. While every IPO is unique, there are generally five steps that are common to every IPO underwriting process.

Step 1. Selecting an Investment Bank or Broker Dealer

The issuing company selects an underwriter, usually an investment bank. It may also select a group or syndicate of underwriters. In that case, one bank is selected as the lead, or book-running, underwriter.

One kind of agreement between the issuing company and the underwriter is called a “firm commitment,” which guarantees that the IPO will raise a certain sum of money. Or they may sign a “best efforts agreement,” in which the underwriter does not guarantee the amount of money they will raise. They may also sign in “all or none agreement.” In this agreement, the underwriter will sell all of the shares in the IPO, or call off the IPO altogether.

There is also an engagement letter, which often includes a reimbursement clause that requires the issuing company to cover all the underwriter’s out-of-the-pocket expenses if the IPO is withdrawn at any stage.

Step 2. Conduct Due Diligence and Start on Regulatory Filings

The underwriter and the issuing company then create an S-1 registration statement. The SEC then does its own due diligence on the required details in that document. While the SEC is reviewing it, the underwriter and the company will issue a draft prospectus that includes more details about the issuing company. They use this document to pitch the company’s shares to investors. These roadshows usually last for three to four weeks, and are essential to gauging the demand for the shares.

Step 3. Pricing the IPO

Once the SEC approves the IPO, the underwriter decides the effective date of the shares. The day before that effective date, the issuing company and the underwriter meet to set the price of the shares. Underwriters often underprice IPOs to ensure that they sell all of their shares, even though that means less money for the issuing company.

Step 4. Aftermarket Stabilization

The underwriter’s work continues after the IPO. They will provide analyst recommendations, and create a secondary market for the stock. The underwriter’s stabilization responsibilities only last for a short period of time.

Step 5. Transition to Market Competition

This final stage of the process begins 25 days after the IPO date, which is the end of the “quiet period,” required by the SEC. During this period, company executives can not share any new information about the company, and investors go from trading based on the company’s regulatory disclosures to using market forces to make their decisions.

After the quiet period ends, underwriters can give estimates of the earnings and stock price of the company.

Some companies also have a lock up period before and after they go public, in which early employees and investors are not allowed to sell or trade their shares.

The Takeaway

The IPO underwriter, typically a large investment bank, plays a vital role in the process of taking a company public.

They help to guide the company through the many hurdles required to go public, including making sure the fledgling company meets all the criteria required by regulators and by the public exchanges. The IPO underwriter helps drum up investor interest in the new company and thereby setting the initial valuation for the stock.

IPOs are an important part of the stock market, and they present an opportunity for investors to get in on a company that may be entering a growth phase by allowing them to buy IPO stocks.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What are the responsibilities and duties of an IPO underwriter?

IPO underwriters have numerous responsibilities. They not only shepherd the private company through the IPO process, they reach out to institutional investors and mutual funds to gauge interest and set the initial price of the stock. They buy the securities from the issuer, and sell the IPO stock to investors via their distribution network.

Can multiple underwriters be involved in an IPO

Yes. Sometimes more than one underwriter is required to help a company meet all the criteria set by the SEC and by the public exchanges.

What criteria do companies consider when selecting an IPO underwriter?

The experience and reputation of the underwriter is an important criteria companies use when establishing this relationship.

Can the performance of an IPO underwriter impact the success of the IPO?

Yes. Some industry data suggests that the better an underwriter’s reputation, the more accurate the initial pricing is, and the less likely there will be long-term underperformance.

Photo credit: iStock/katleho Seisa

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Sep
11
2023
IPO Book Building Process Explained

IPO Book-Building Process Explained

By | Growing Wealth, invest, Investing | Comments Off on IPO Book-Building Process Explained

Initial public offering (IPO) book building can help with efficient price discovery for companies looking to IPO. After the IPO, when shares are available for trading in the secondary market, book building may also be used to price secondary equity offerings.

With book building, the investment bank that underwrites an IPO reaches out to institutional investors to gauge their interest in buying shares of a company looking to go public. The underwriter asks those interested to submit bids detailing the number of shares they seek to own and at what price they would be willing to pay.

The process of book building has become more common than the fixed-pricing method, which may not yield the most accurate results.

Recommended: Why Do Companies Go Public?

Key Points

•   Book building is the preferred method by which a company prices IPO shares.

•   There are five key steps in the IPO book building process: find a banker, collect bids, determine a price, disclose details, and allotment.

•   Partial book building is restricted to institutional investors, while accelerated book building is used for large equity offerings to raise capital in a short period.

•   The risk of an IPO being underpriced or overpriced when shares go public can lead to volatility, making IPO investing a high-risk endeavor.

•   The goal of book building is to make sure proper market-based price discovery to help the issuing company set a fair share price.

What Is Book Building?

Book building is the preferred method by which a company prices IPO shares.

Among the first steps of the IPO process is for the private company to hire an investment bank to lead the underwriting effort. IPO book building happens when the IPO underwriter gathers interest from institutional investors, such as fund managers and other large investors, to determine the value of the private company’s shares.

As part of the IPO and book-building process, the investment bank must promote the company and the offering to stir up interest before they can determine share price.

This is often called an IPO roadshow. If the underwriter finds that there is sufficient interest based on responses from the investor community, then the bank will determine an offering price to the issuer.

Book building is recommended by all the major stock exchanges, and is common practice in most developed countries. It has become more popular than the fixed-pricing method, which involves setting an IPO price before measuring investor interest. Book building, on the other hand, generates and records investor interest to land on an IPO price.

Thus book building helps find a fair share price for a private company based on market interest. When a bank gauges market interest, a floor price is sometimes used, and bids arrive at or above that floor price. The stock price is determined after the bid closing date. With the book building method, demand can be seen in real-time as the book is being built.


💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

Book-Building Process

Firms going public want to sell their stock at the highest possible price without deterring the investment community. There are five key steps the issuing company must perform in the process of IPO book building in order to discover a market-based share price.

1.    Find a Banker: The issuing company hires an investment bank to underwrite the transaction. The underwriter advises the company, guiding it through the lengthy book-building process. The investment bank also commits to buying all the shares from the issuer, carrying all the risk. The bank will then resell the shares to investors.

2.    Collect Bids: The investment bank invites investors to submit bids on the number of shares they are interested in and at what price. This solicitation and the preliminary bids give the bankers and the company’s management an indication of the market’s interest for the shares. Roadshows are often used to grow investor appetite.

3.    Determine a Price: The book is built by aggregating demand as the bids arrive. The bank uses a weighted average to determine a final cutoff price based on indications of interest. This step helps with pricing an IPO.

4.    Disclosure: The underwriter must disclose details of the bids to the public.

5.    Allotment: Accepted bidders are allotted shares.

Even if the IPO book-building process goes smoothly and a price is set, it does not ensure that actual transactions will take place at that price once the IPO is open to buyers. Book building simply helps to gauge demand and determines a fair market-based price. But substantial risks remain for interested investors, who could see steep losses if the share price drops after the IPO.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

What Is Partial Book Building?

Partial book building is another form of the IPO book-building process that happens only at the institutional level, rather than the retail level.

With partial book building, a select group of investors is approached regarding their interest in the IPO. Using their bids, a weighted average price is calculated and a cutoff price is determined. That cutoff price is then used as the public offering price to retail investors as a fixed price. The cost of the partial book-building IPO process is often lower due to its relative efficiency.

What Is Accelerated Book Building?

Accelerated book building is used for large equity offerings to raise capital in a short period of time. The investment bank is tasked with book building, determining a cutoff price, and allocating shares within 48 hours or less. No roadshow is involved.

The accelerated book-building process is used when a company needs immediate financing and raising capital from debt is off the table. It is typically done when a firm seeks to acquire another company.

Accelerated book building is often conducted overnight, with the issuing company asking investment banks to serve as underwriters before the next day’s placement.

What Effect Does Book Building Have On IPO Prices?

A good IPO book-building process helps ensure proper market-based price discovery. Still, there is the risk that an IPO can be underpriced or overpriced when shares finally go public. This can lead to volatility, which IPO investors also need to be aware of. This is one reason why IPOs are considered high-risk endeavors.

Underpricing, the main risk to the issuer, happens when the offering price is materially below the share price on the first day of trading. With an underpriced IPO, a company is said to have left money on the table, while an overpriced IPO can have negative implications on the future price of a stock due to poor investor sentiment. Investors can buy IPO stock on Day One of trading in the secondary market, while qualified investors can purchase IPO shares before they begin trading in the open market.

While there is no surefire way to guarantee a good IPO price, the book-building IPO method offers quality pre-market price discovery customized to the issuer. It also reduces the risk for the underwriter. It can have high costs, however, and there is the risk that the IPO will end up being underpriced. The overall goal is to see a good and steady stock performance during and after the IPO.

The Takeaway

The book-building IPO process involves critical steps to ensure a stock goes public promptly with as few hiccups as possible.

There are different types of IPO book building, and the way an investment bank performs the process can impact IPO prices. The goal is for efficient price discovery on shares of the company looking to go public. Book building can also be used for secondary equity offerings.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What are the steps in book building?

There are 5 main steps in the book-building IPO process:

1.    The issuing company hires an investment bank to underwrite the offering. The bank determines a share price value range and writes a prospectus to send to potential institutional investors.

2.    The underwriting bank invites institutional investors to submit bids on how many shares they want to buy and at what price.

3.    The book is built by sorting and summing demand for the shares to calculate a final IPO price. It’s known as the cutoff price.

4.    The investment bank is required to disclose the details of submitted bids to the public.

5.    Shares are allocated to accepted bidders.

What is 100% book building?

100% book building is a process in which 100% of the offering is done on a firm basis or is reserved for promoters and permanent employees of the issuing company.

Photo credit: iStock/PeopleImages

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0623080

Read more
Sep
10
2023
Why Invest in Bankrupt Companies?

Why Invest in Bankrupt Companies?

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on Why Invest in Bankrupt Companies?

Investors put their cash in the market in order to make more money, not lose it. So it can be befuddling, then, that some people are interested in bankruptcy investing—or, buying stock in Chapter 11 (bankrupt) companies.

While bankruptcy investing is a type of investment that may appeal to some, it’s a high-risk strategy that may not be the best route for most investors. Read on to learn about bankruptcy investing, and why investors might be interested in buying stock in Chapter 11 companies.

Different Types of Bankruptcy

Bankruptcy is a complex, legal process that companies, municipalities, and individuals undergo when they’re unable to pay their debts. It’s important to know that just because a company declares bankruptcy doesn’t mean that it’s no longer an operating business.

There are six different types of bankruptcy, known as chapters, with Chapters 7 and 11 applying to businesses.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy means that a company is ceasing operations and liquidating its assets. If a company declares Chapter 7 bankruptcy, assets are sold off for cash, and used to pay off its debts in an order determined by bankruptcy laws. Often investment bankers head the valuation process and help companies sell various assets during the bankruptcy process.

Then, bondholders and investors get their share of any assets left. When all is said and done, the company will no longer exist, and any assets it had will have new owners.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy, or “reorganization,” is different from Chapter 7. Companies often file for Chapter 11 bankruptcy as a defensive move when their debt payments become untenable.

Under Chapter 11 protections, companies focus on restructuring and getting their debt under control, increasing revenues, and cutting costs. During the bankruptcy reorganization, companies can often renegotiate interest rates or eliminate some debt payments entirely.

These companies are basically calling a time-out so that they can revise their gameplan. Companies often keep operating under Chapter 11 bankruptcy. Ultimately, the goal is to use Chapter 11 protections to buy some time, put together a plan to emerge from bankruptcy, and return to profitability.

What Happens To Stock When A Company Goes Bankrupt?

Under Chapter 7 bankruptcy, investors’ shares are effectively dead, since the company is going out of business.

If a company files for Chapter 11 bankruptcy protection, a few things could happen. Shares could continue trading as normal, with little or no effect (other than price fluctuations) for investors. The stock may get delisted from major stock exchanges, but can still be traded over-the-counter (OTC). But be aware: The company may also cancel shares, making some investors’ holdings worthless.

Why Invest in a Bankrupt Company?


A company declaring bankruptcy sends a pretty clear message to investors that it’s in trouble, which can cause share prices to fall. For some investors, falling prices present an opportunity to buy—an attractive one, especially if they believe that those companies will return to profitability in the future.

At its core, bankruptcy investing is all about perceived opportunity. Many large companies with recognizable names have declared bankruptcy in recent years (examples include GNC, Hertz, Gold’s Gym, JCPenney, and Pier 1 Imports), and buying big-name stocks at rock-bottom prices can be very appetizing to investors.

There’s a chance that these companies can and will emerge from bankruptcy with streamlined operations that can quickly start driving revenue, causing share prices to increase in value. But it’s also possible that a bankrupt company is too far gone, and won’t be able to return to profitability. Investing in bankrupt companies is speculative and risky, but the potential of big rewards is enticing to some investors.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Research to Do Before Investing in Bankrupt Companies

When investing in any stock (not just bankruptcy companies), it’s important to do your research, or due diligence on the company. For many investors, that means doing more than just looking at the price fluctuations over the past few days—it involves digging into the nitty-gritty details. Often, those processes can include fundamental and technical analyses.

Fundamental analysis of stocks involves taking a look at, well, the fundamentals of a company. That could include evaluating a company’s profits and growth, or metrics like earnings per share or cash flow. Investors are generally looking for strong companies to invest in, and generally, analyzing a company’s performance will give a sense as to whether or not it’s worth investing in.

Stock technical analysis, on the other hand, is a little more…technical. It involves looking at a stock’s patterns and trends in order to try and predict what it will do next. Essentially, it’s a method of forecasting a stock’s future performance based on its historical performance.

Recommended: 5 Ways to Analyze A Stock

Of course, if a company is bankrupt, both fundamental and technical analyses will likely provide some less-than-inspiring data, such as an unsustainably high leverage ratio. These companies have gone bankrupt, after all—so, investing in a bankrupt company will also require a leap of faith and research into their industry and their plan to return to profitability.

The Takeaway

Investing in bankrupt companies is a risky endeavor. While it may hold the potential for rewards for those who do their research and are willing to take the risk, it may not be the best choice for most investors.

There are many other ways to invest for those who are looking for a less risky, more sustainable, long-term investment strategy.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/Rocco-Herrmann

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0723007

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