How to speak IPO: A glossary

Going public is a long, intricate and technical process where a company needs to meet a range of regulatory requirements (including the listing rules of the exchange), and do a massive amount of work, including due diligence processes and preparing documents for potential investors to read. Our glossary is a tool to help you understand some of the key concepts and terms when it comes to being in the know about IPOs.

Allocation

Once applications for shares are received, the company and its advisers work out how many shares applicants may receive and at what price - this is allocation.  An IPO might be “oversubscribed” which means there are more applications than there are shares available to be allocated.  If so, you may receive less than, or none, of the shares you applied for.

Book-building process

The book-building process is how the final issue or offer price for an IPO is decided based on the demand, and the price that institutional investors (such as fund managers) indicate they’re willing to pay. If investors are keen on an IPO, the issue price might be at the higher end of the price band or above it. If investors show less interest in the IPO, the issue price might be at the lower end of the range or below it.

Direct listing

A direct listing is an alternative way for companies to list shares on a share market without going through a traditional IPO. In a direct listing, the only shares listed are already owned by the company's founders, financial backers and employees. Unlike IPOs, no new shares are created. Direct listings can cut out the ‘middle-person’, like the underwriters, and save the company money. A direct listing allows existing investors and employees to sell their shares, without new shares being issued and diluting existing shareholders.  Without the ‘middle person’ underwriting the listing, there is no safety net ensuring shares sell. Companies like Palantir (PLTR), Roblox (RBLX), and Coinbase (COIN) have gone public in the US with a direct listing.

Diversification

Diversification is spreading risk across a mix of different investments. Having money invested in a variety of asset classes, industries, countries, company sizes and term lengths is a strategy that some investors use to limit risk exposure.

Effective date, or listing date

The effective date, or listing date, is the day the relevant exchange lists the shares and trading commences.  This happens once shares have been allocated (and usually once they’ve been paid for) and includes the exchange having given a company the stamp of approval to have their shares listed on a share market; to do this the exchange has made sure they can abide by all the exchange’s rules. On this date, the total number of shares is confirmed along with the listing price, and all investors can buy shares in the company on the share market (even if you missed out on an allocation in the IPO).

Form S-1, or registration statement

For IPOs in the USA, the S-1 is also known as a registration statement. It must include any material information about the company so that potential investors can understand what the company does, why it is issuing shares through an IPO, the state of its finances and what type of ownership structure is being offered. This document must be filed with the US Securities and Exchange Commission (SEC) before a company can list shares for sale on the US share markets.  There are other “S” versions as well, depending on the type of company IPO-ing.  In other countries this might be called the “Prospectus”.  The company will have to provide financial statements as part of these documents. 

Going public

Going public is another way of saying a company is going through an Initial Public Offering (IPO). It’s a more colloquial term to describe how a company is transitioning from private ownership, owned by their founders, financial backers, and employees, to public ownership, where anyone can buy shares in the company on a share market.

Indicative price

The indicative price, or price range, is an estimated price range given to potential investors to give them an idea of the final price they’ll pay for shares. It’s set by both the company and the underwriter. Note, it’s not guaranteed that the final price will be in this range; it is meant as a guide for potential investors only.

Initial Public Offering (IPO)

An Initial Public Offering (IPO) is the process of a company moving from private ownership - owned by their founders, financial backers and employees - to a public company, where the shares are listed on a share market for anyone to buy and sell. It’s sometimes also referred to as going public. Want to know more? Learn more about how IPOs work and how to do your research.

Institutional investors

Institutional investors are the bigger investors who regularly participate in share markets, and are usually trading on behalf of its clients or customers – think big banks, fund managers, government and pension funds, wealth adviser groups and similar. During an IPO, institutional investors are approached by the company’s advisers to determine demand.  In some IPOs ‘retail’ and individual investors also get a chance to participate. After the IPO, shares become available to everyday individual investors through the share markets.

Issuer

The issuer is the company going public in an Initial Public Offering (IPO), which is issuing - aka ‘offering’ - shares to be bought and sold by investors in the share markets.

Issue price, or offering price

The issue price, or offering price, is the final IPO share price that people who have received an allocation pay to receive shares as part of the IPO. The final share price is usually not confirmed until the last moment; once the book-building process is complete.  It might be different to the Indicative price and is different again to the opening price.

Listing, or being listed

Listing is when IPO shares become available to buy and sell via a share market or stock exchange. A company goes from private ownership to public ownership by listing on a share market through an Initial Public Offering (IPO) or direct listing or a SPAC.

Listing date

The effective date, or listing date, is the day the relevant exchange lists the shares and trading commences.  This happens once shares have been allocated (and usually once they’ve been paid for) and includes the exchange having given a company the stamp of approval to have their shares listed on a share market; to do this the exchange has made sure they can abide by all the exchange’s rules. On this date, the total number of shares is confirmed along with the listing price, and all investors can buy shares in the company on the share market (even if you missed out on an allocation in the IPO).

Lock-up period

A lock-up period is usually between 90-180 days. It’s when founders and some early investors and employees are restricted from selling their shares after an IPO. The goal is to avoid flooding the share markets with too many shares in the company, causing the share price to drop due to oversupply. Once the lock-up period ends and all restrictions are lifted, investors can sell as many shares as they choose.

Minimum subscription

The minimum subscription is the lowest amount of IPO shares investors need to buy for an IPO to complete successfully - typically 90%. This means if the 90% threshold isn’t met, the company returns the money from the orders placed. This situation is considered an undersubscribed IPO, and while it’s not common, it could be due to poor promotion or share market or economic conditions at the time.

Opening share price

The opening price is the initial cost of one share in a company when it’s first listed on the share markets. It’s often different from the offering price of an IPO, which is the price of shares before the company is listed on a share market.

Oversubscribed

An IPO is oversubscribed when investors have requested more shares in a company than there are available - where demand exceeds supply. An oversubscribed IPO means investors are keen to buy the company's shares, often leading to a higher IPO share price or more shares offered for sale. This contrasts with an undersubscribed IPO. 

Public, or going public

Going public is another way of saying a company is going through an Initial Public Offering (IPO). It’s a more colloquial term to describe how a company is transitioning from private ownership, owned by their founders, financial backers, and employees, to public ownership, where anyone can buy shares in the company on a share market.

Price range

The price range, or indicative price, is an estimated price range given to potential investors to give them an idea of the final price they might pay for shares. It’s set by both the company and the underwriter. Note, it’s not guaranteed that the final price will be in this range; it is meant as a guide for investors only.

Prospectus, or offer document

The prospectus must be filed with the relevant exchange and be made public, along with the S-1 for listings in the US, before a company can list shares for sale on the share markets. Before investing in the company, investors can use this document to conduct their due diligence - looking at the company's assets, liabilities, financial performance, risk factors, and commercial potential. The prospectus is updated before the listing date when the IPO price and number of shares are determined through the IPO process.

The prospectus includes information, such as how much money the CEO stands to make when the company makes their public debut, how much money a company intends to raise in their IPO, and what the company plans to do with the money. It also includes information about their competitors, and importantly, it’s the first time the world gets to take a look at the company’s total financial picture.

Quiet period

In the US, a quiet period is when the company going through an IPO must be quiet about the business. This is mandated by the SEC and often covers a period between when documents are initially filed with the SEC and 40 days after the listing date. The goal is to allow the SEC to review and verify the information they’ve been given, give investors a level playing field and protect investors by ensuring the company doesn’t falsely inflate their value leading up to the listing date.

Roadshow

A roadshow refers to sales presentations the company delivers to large institutional investors before an IPO. The company's leadership team - the issuer - holds a series of meetings with potential investors to generate interest in their IPO.

Securities and Exchange Commission (SEC)

The US Securities and Exchange Commission (SEC) is the regulator for the US share markets. It’s an independent government agency that aims to protect investors, maintain fair, orderly and efficient markets and helps facilitate access to capital for companies. Part of their job is to oversee the process of companies going public, making sure they follow the rules.

Secondary offering

A secondary offering is the sale of shares held by early investors of a company that has already gone through an Initial Public Offering (IPO). This may happen alongside an IPO as an additional, secondary transaction. Usually, the company doesn’t receive any cash or issue new shares. Instead, investors buy and sell shares directly from each other.

SPAC (Special Purpose Acquisition Company)

Another way a company can list their shares on the share markets is through a Special Purpose Acquisition Company (SPAC). A SPAC is essentially a shell company, or a ‘blank cheque’ company, set up by investors with the sole purpose of raising money on the share markets to merge with a private company and take it public. SPACs can be popular options to list on the share markets because they’re much faster and less complex than a typical initial public offering (IPO) process. Companies like Rocket Lab (RKLB), Lucid (LCID) and Enovix (ENVX) have gone public in the US with a SPAC.

Undersubscribed

The minimum subscription is the lowest amount of IPO shares investors need to buy for an IPO to complete successfully - typically 90%. If the threshold isn’t met for a minimum subscription, it’s considered an undersubscribed IPO - where supply is greater than demand. While it’s not common, the company returns the money from the orders placed. An undersubscribed IPO is can be due to poor promotion, overpricing, or share market or economic conditions at the time. It can also be referred to as underbooking. This contrasts with an oversubscribed IPO. 

Underwriter

Underwriters are investment banks like Morgan Stanley or JP Morgan that work closely with companies to manage the end-to-end IPO process. They help decide the initial offering price, promote the IPO in a roadshow and distribute shares to investors. They reduce the risks during the IPO process for the company by agreeing to assume the risk of buying all or a portion of the shares to be issued in the IPO and then selling those to the public at the IPO price but of course, command big fees for doing so.

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