IPOs explained & upcoming IPOs

How do IPOs work?

Prospectus

When a company wants to go public, it hires an investment bank to underwrite the IPO. Underwriting is the process of raising money, either by debt or equity (in this case we’re referring to equity).

The first step involves the negotiation of the deal between the company and the investment bank. Items usually discussed include the amount of money a company will raise, the type of securities to be issued and other particularities mentioned in the underwriting agreement.

Once all sides agree to a deal, an initial Draft Offer Document (Prospectus) must be filed with the Bermuda Monetary Authority. This document contains all the relevant information investors would require to make an informed decision about investing in the company.

Applications

A portion of the shares on offer will be allocated to customers, investors, or to the general public. If you are entitled to apply, you can do so by completing the form in the Prospectus or via your stockbroker.

Allocations

Once applications have been received, the allocation of shares granted to each underwriting firm involved in the IPO is confirmed.

Listing

The shares will then be listed on the stock market when allocations have been made and applications have been received. Once listed, you can trade the company’s shares as per usual, keeping in mind that their price can increase or decrease depending on market conditions.

Performance of recent major IPOs

On 2 March, Snap Inc. went public on the New York Stock Exchange. The tech giant was valued at $28 billion at the end of its first day of trading, with its share price having rocketed from a guide price of $17 to a closing price of $24.48.

Facebook's wariness of the threat posed by its Silicon Valley neighbour has proved entirely justified. With the $3.4 billion share sale alone, Snapchat co-founders Evan Spiegel and Bobby Murphy already surpassed the buyout offer Facebook CEO Mark Zuckerberg once made them. By holding out, they have achieved the largest IPO since Alibaba’s in 2014.

Announced back in early February, Snapchat’s IPO appeared ambitious, even after the photo-sharing company lowered its original valuation expectations to $22 billion. The five-year-old company’s revenue increased by 600% in 2016, but there have long been questions over a business model that anticipates substantial future operating losses and foregoes profitability. Muddying the waters further still was the choice not to sell voting shares, meaning its executive board would still keep total control of the entire company even with public funds.

Clearly this did little to deter investors. The question now is whether the optimism will pay off. In the lead-up to the flotation, analysts used Twitter and Facebook as touchstones by which to assess Snapchat. But both of these companies’ fortunes have diverged in dramatic ways since going public, making it hard to know if investor confidence will prove justified in the long term.