How Initial Public Offerings (IPOs) work
What is an IPO?
An Initial Public Offering (IPO or float) is a process whereby a company raises equity capital by offering shares to the public for the first time. As an investor you may be able to access shares in an IPO, either directly or via your broker. Following an IPO, the company is ‘listed’ on the share market, and its shares can be traded.
How IPOs work
The Company issues an IPO and listed on the ASX.
Prospectus
In order to raise equity capital via an IPO, a company must first prepare a prospectus and lodge it with the Australian Securities and Investments Commission (ASIC). The prospectus must contain all the relevant information investors would require to make an informed judgement regarding investment in the company.
Applications
The company will decide to whom it wishes to offer its shares. Some companies will allocate a portion of the shares on offer to customers, institutional investors, or to the general public. If entitled to apply for shares, you can do so by completing the application form in the prospectus (or via your broker if they are participating in the IPO).
Allocations
Once applications are received, the company and its advisers will confirm allocations. If an IPO is 'oversubscribed', it means that the company has received applications for more shares than it has on offer. In this case, your application may be subject to ‘scale back’, and you may receive fewer shares than what you applied for or even none at all.
Listing
When allocations have been made and the application money received by the company, the new shares will then be 'listed' on the share market. Once listed, the company's shares can be traded as normal, and their price can rise or fall depending on market conditions and supply and demand for the shares.
Rights issues
A 'rights issue' is where an already listed company seeks to raise additional capital by offering new shares to existing shareholders. Shareholders are offered additional shares in the company on a predetermined basis; for example, one additional share for every 10 held. Rights issues are normally offered at a discount to the prevailing market price. Participation is optional.
Placements
A 'placement' is where an already listed company seeks to raise equity capital by offering new shares to a number of selected investors. Placements are typically made to institutional investors such as fund managers, but can also be made to clients of stockbroking firms. Placements are normally offered at a discount to the prevailing market price.
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