It’s been 12 long months. You are finally fully vaccinated and have been invited to your first post-pandemic dinner party.
You get to the party and after the usual greetings and small talk the conversation shifts to an animated discussion about the latest way to participate in an IPO. You remember reading something about it in the Wall Street Journal but…what was it called? A SPAC? And what is that!?
Let’s get you prepared in case this actually happens to you. Here’s a brief primer on IPOs and the associated lingo.
There are 3 ways to participate in an IPO (initial public offering).
Direct listing. This is when a company wants to raise capital without underwriters. In this process, the company sells shares directly to the public without getting help from intermediaries.
SPAC (Special Purpose Acquisition Companies). SPACs are shell companies set up by investors with the sole purpose of raising money through an IPO to eventually acquire another company. The money raised goes into an interest-bearing trust account until the SPAC management team finds a private company that wants to go public through an acquisition. A SPAC has no commercial operations, and its only assets are the money raised in its own IPO. In 2020, about 248 SPACs were listed, raising about $80 billion.
Investment banker. In regular IPOs an investment bank becomes the underwriter for the company’s initial public offering. This involves placing an overall value on the company as well as acquiring shares at a discount to later be distributed in the public markets.
Here are some additional terms to add to your IPO vocabulary.
S-1 Filing – This is the first step when a company wants to go public (IPO). The company files the Form S-1 with the Securities and Exchange Commission (SEC).
Quiet period – Time period in which companies are forbidden by the SEC to promote or hype the offering; starts the day a company files a registration statement and lasts up to 25 days after a stock starts trading.
Lockup period – Time period after an IPO when insiders at the newly public company are restricted by the lead underwriter from selling their shares in the secondary market.
Oversubscribed – When investors have expressed an interest in buying more shares of a new security than will be available; under this condition, the price of the security has a greater likelihood of opening higher than the offering price in the secondary market.
Follow-on offering (FPO) – An offering of shares after an IPO.
And when someone at the end of the dinner table throws out the term “tender offer” you can remind them that this is an exchange of shares of an already publicly traded company. It is not an IPO.
