How to Sell Stock Shares Through Underwriters
Companies sell shares to the public, also known as going public or making a public offering, through one or more investment dealers or underwriters who form an "underwriting syndicate." Existing public companies may sell additional shares to investors. The underwriters purchase the shares from the company at a specified price, known as the offering price, and sell them to investors.
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Instructions
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Select a lead underwriter. This is the investment dealer who will form and lead the underwriting syndicate to help sell the shares. Reputation, size and industry experience are some of the key criteria in choosing underwriters.
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Specify the parameters. Discuss your company's funding requirements and legal and other technical details of the public offering with your underwriters, who will guide you through the regulatory steps. The underwriting agreement is also negotiated at this stage, including the fee structure.
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File a registration statement. New companies must file their registration statements with the U.S. Securities and Exchange Commission on Form S-1. This form includes the offering prospectus, which contains audited financial statements, key business relationships, management background, future prospects and risk factors.
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Set the offering price. For an existing company, the price can be set easily, based on the stock's market price. For initial public offerings, or IPOs, the underwriters and the company normally analyze the financial statements and set a price. Management and board members usually participate in media and investor events to promote their company to potential investors. The underwriters typically begin a "book building" process to solicit bids from clients. If there is strong interest, the company may decide to sell more shares, raise the offering price or do both. If there is not enough interest, the offering price may be reduced or the IPO may be withdrawn altogether.
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Release the shares to the underwriters. The stock starts trading on the offer date, which is usually shortly after the required regulatory approvals have been received. The lead underwriter may implement price stabilization measures in the first few days of trading to prevent the price from dropping too low.
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Monitor the share price. A public company typically has an investor relations team that monitors trading activity and market commentary, and responds to questions from the investor and analyst communities.
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Tips & Warnings
Underwriters usually allocate IPO shares to a select group of investors, such as high net worth clients and active traders.
The advantages of a public offering include greater access to capital and a chance for employees to profit from their stock options. The disadvantages include the time and expense involved in a public share offering, increased scrutiny and constant pressure to meet earnings expectations.
An IPO is a risky and speculative investment and is not for every portfolio. Review the filing prospectus and the background of the underwriting firm before investing in IPOs.
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