Taking BBE Public (2)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

With the approval of our shareholders, Alice, our President, and Mary Jo, our CFO, started a round of meetings with several investment banks to see who might be willing to help Best Blogs Ever, Inc. (BBE) with its initial public offering (IPO).  After meetings with 10 local and regional investment companies, they arranged for our Board of Directors to meet with USA Investment Company and Stock Traders, Inc., two investment companies who were willing to discuss an IPO for BBE.

Our first meeting was with Matt and Steve from USA Investment Company (USA).  They explained that USA was strictly an underwriting securities firm.  They sell new securities to institutions and wealthy investing groups in what is known as the primary market.  The primary market is also called the new issue market.  USA does not have retail brokers who act as agents in the purchase and sale of securities for individual investors.  As underwriters, they would review BBE's financial statements and determine what price BBE's stock might command in the public market.  They would then offer to buy BBE's stock at a price lower than the anticipated opening price to the public.  This profit is their compensation for handling the IPO.  Once a discounted price is agreed upon, USA would purchase all of the shares to be issued by BBE at the lower price and then resell those shares to its stable of investors at the higher price.  Although publicly traded, the shares would be initially owned by the underwriter, not the investing public.

Our next meeting was with James and Meredith from Stock Traders, Inc. (STI).  Unlike USA,  STI has a cadre of retail stock brokers, who act as agents for retail individual investors buying and selling stocks which are publicly traded on stock exchanges.  While STI does not act as an underwriter for private companies with their IPOs, it has worked in the past with underwriting firms to sell the shares purchased by the investment company to individual investors.  STI works in the secondary market.

Underwriters take a big risk if they agree to purchase a new public company's shares.  If the shares can not be sold at or above the price the underwriter agrees to pay the issuer, it faces potentially large losses.  If the underwriter does not think that all of the shares the company wishes to issue can be sold or if the overall market conditions are not conducive to the sale of new issues of stock, it may offer to underwrite the stock on a best efforts basis.  Instead of purchasing all of the newly issued shares at a discounted purchase price and making a profit on the sale of those shares at a higher price, an underwriter will do everything it can to sell the shares, but is not legally obligated to buy the entire issue.  It will put forth a full marketing effort to sell the issue, but if the shares can't be sold, the investment company is not on the hook for the unsold shares.  Since there is no profit opportunity in this sort of underwriting, the issuing company must pay a commission to the underwriter on each share sold.

We will learn more about the IPO process in the next blog.

Comments are always welcome.