Renaissance Capital's IPO University is a helpful guide for getting up to speed on the basics of IPO investing, following the market, and understanding common terms. From the basic "What is an IPO?" to complex definitions, our followers find our IPO Glossary invaluable when learning how to "speak IPO." Below are some of our most popular pages from the glossary.
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Popular Terms
Initial Public Offering (IPO)
This is the event of a company first selling its shares to the public. Due to unseasoned trading and lack of information, equities are often referred to as IPOs for months, if not years, following their debuts. Stocks that trade on the OTC or international markets are often called IPOs when they first offer shares in the US.
IPOs raise fresh capital to fuel expansion or acquisitions, and allow companies to tap capital markets in the future. An IPO also provides liquidity for investors, founders and employees. Widely covered by the financial press, an IPO is a marketing event that builds brand awareness. Executives, employees, customers, suppliers and other partners value the transparency and permanence of working with a public company.
A company begins the IPO process years in advance, bringing on a CFO, an auditor, a law firm, independent directors, and others. When it is ready, the company will have a beauty contest, selecting a lead manager and other investment banks to underwrite the deal. More often than not, it will first submit a confidential filing, so that it can privately hash out the required disclosures with the SEC staff. A public filing then follows, with the preliminary prospectus available on EDGAR. As soon as 15 days later, the company can file the proposed terms of the offering and launch its IPO roadshow. This is where management pitches its strategy to the buy side. After the roadshow, the company and the lead manager decide on an IPO price, and the stock begins trading the following day.
Going public is an expensive and time-consuming process, in large part due to regulations designed to protect investors.
Bookrunner
One of the lead investment banks underwriting an IPO. Underwriters in the syndicate can be active or passive bookrunners, though they all will have a bigger role than co-managers. In practice, the lead manager is the bank that actually runs the book-building process: collecting orders, determining allocations and setting an IPO price based on demand and management’s expectations.
Co-manager
An investment bank hired to underwrite an IPO with a less active role than a bookrunner. Co-managers will allocate far fewer shares and collect fewer fees. Like bookrunners, co-managers will usually initiate research after the quite period.
Confidential Filing
Companies may submit a draft registration statement to the SEC for confidential, non-public review prior to a public IPO filing. Companies receive feedback from SEC staff and modify the prospectus accordingly. The prospectus is then nearly finalized by the first public filing, and a company can launch its roadshow as early as 15 days later.
Dual Class
Tech companies often sell the public shares that come with fewer votes. These Class A shares may have 1 vote, while insiders keep Class B shares with 10 votes apiece. This is often pitched as a way of protecting the founder’s vision from the vicissitudes of Wall Street. However, investors should be wary of giving up voting control. Google was one of the first large tech IPOs to have a dual-class IPO. Snap took it a step further, offering IPO investors shares without any voting power.
Dual Track
This is where a company simultaneously files IPO paperwork and shops the business to potential acquirers. Private equity firms and corporate spin-offs more often run a dual track process, since an acquisition allows them to immediately realize a known return on their investment.
Emerging growth company
Established in 2012 under the JOBS Act, emerging growth companies (EGCs) have less than $1 billion in annual sales, and have fewer requirements for going public. They are allowed to IPO with two years of audited financial statements instead of three, do not need an auditor's opinion on their internal controls over financial reporting, and can use test-the-waters communications with institutional accredited investors.
Green Shoe
A typical underwriter agreement allows the underwriters to buy up to 15% in additional shares at the offering price for a period of several weeks after the offering. This option, also called the overallotment, is available if the deal is oversubscribed, and is always exercised if the IPO had strong positive trading. The ability to buy additional shares also allows underwriters to manage aftermarket trading. The term comes from the Green Shoe company, which was the first to have this option.
Net Roadshow
Underwriters will post online videos of management's pitch to investors. These net roadshows mimic the live roadshow, often using the same slides and subject matter. Net roadshows contain valuable information, and allow individuals to assess management's ability to effectively communicate their story. However, net roadshows do not allow for a Q&A. And regrettably, some net roadshows are restricted to institutional investors by requiring passwords.
Oversubscribed
When a deal has more orders than there are shares available it is said to be oversubscribed. Many underwriters like to see a book several times oversubscribed because they know that investors inflate the size of their indications of interest. When a book is grossly oversubscribed (>10x) it is said to be a hot deal.
Quiet Period
(1) After filing for an IPO, a company, its executives and its underwriters are restricted from making certain public statements regarding its value, strategy, or forecasts. Instead, the SEC only allows them to discuss information already contained in public prospectus. This is called the quiet period. (2) After the IPO is priced, the underwriters wait 25 days before issuing research. This is still the quiet period. Officially, emerging growth companies are not subject to this quiet period rule, while other IPOs have a 10-day waiting requirement. However, investment banks generally observe the old 25-day quiet period through an abundance of caution.
SPAC
Acronym for Special Purpose Acquisition Company. Synonymous with Blank Check Company.
Testing the Waters
Normally, IPOs are restricted from soliciting demand, or "testing the waters", for the deal before it officially launches. However, the 2012 JOBS Act allowed emerging growth companies to get feedback from qualified institutional buyers (QIBs). Under Regulation A+, an issuer can test the waters with any potential investor, even soliciting interest online or advertising the offering on TV. Being able to test the waters lets companies have a better sense of what valuation they can fetch in public markets, or if they can get an IPO done at all.
