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Principles of finance ah la shmoop aipo process All right

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So for our good friends already in bernie it's aipo

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time here are the basic steps involved when i po

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process and how they'd impact the sauce Company number one

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the company decides to go public It hires the underwriters

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who are the midwife's for this birthing process The underwriters

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buy the shares that the company wants to sell and

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then like five minutes later resells them to the public

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technically that's how they actually go public Easy This part's

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done The sauce company has hired silver slacks and they

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have an agreement in place to get the magic of

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the sauce company to the portfolios of america and the

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world for an appropriate amount of money Of course they

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take a spread All right Process Item number two The

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underwriters advise the company on matters that are relevant to

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the whole process such as legal requirements pricing timing and

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quantity of shares or ownership of the company to sell

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on the offering Like are they going to sell five

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percent Ten percent twenty percent of the company to the

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public All right well we're good here to silver slacks

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Is telling already in bernie all about what they must

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dio and what the laws forbid them to do right

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next number three due diligence and we have a whole

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video on this anymore do means appropriate or proper The

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underwriters reputation here is on the line so the sauce

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company must turn its head and cough It'll be subject

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to a detailed investigation of the company's financial picture its

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product it's prospects its customers its financial health everything It

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will also do a fair amount of investigation of the

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company's management as well Just make sure that they don't

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have any history of legal in proprieties you know like

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a felony they didn't disclose Okay so this is a

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work in process with the sauce Silver slacks analysts will

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spend a lot of time poking around the sauce company

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for the next few months Get used to it All

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right Process number four documentation Assuming that the due diligence

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doesn't reveal any major show stopping problem Yes And you

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know they're almost always minor issues that must be resolved

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while the next step is to get the lawyers involved

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and start dotting all the legal i's and crossing the

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legal tease the company can choose its own lawyers for

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this process but in most cases the underwriter will gently

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recommend that the company used lawyers that the underwriter has

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worked with in the i asked that they typically come

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from the sec or worked there or at least know

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the drill The company can reject this gentle recommendation but

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in most cases the underwriter will threaten walk away if

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they don't go with lawyers they kind of know in

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respect Usually the underwriter wins this battle next number five

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the main activity of the lawyers is to prepare the

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prospectus or the offering statement think about it like a

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marketing memorandum Well this is required by the sec In

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most instances the prospectus is a long exceedingly boring document

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that describes in excruciating detail what the company does its

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management and its prior financial history It doesn't have to

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be omg long but one of the lawyers can't justify

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their enormous fees if they don't make it long The

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main faces of any prospectus is disclosure Investors must be

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afforded sufficient information so that they can make an informed

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decision and note this is not anyone recommending buying or

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selling a stock it's simply informing them according to the

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rules of how everyone else gets informed with lawyers for

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the sauce company will prepare the prospectus in conjunction with

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silver slacks which will provide the relevant financial info along

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with the auditors All right next item number six disclosure

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Well a big part of the prospectus will be devoted

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to disclosing risks Lawyers sue people for a living They

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sure don't like to be on the receiving end so

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they try to protect themselves by disclosing any possible risk

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that would result in an investor losing money and then

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suing them for lack of disclosure The risk disclosure piece

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of a prospectus can run many pages in length and

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it basically just covers your well your hind quarters when

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and or if you do get suit Alright Number seven

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the sec review After preparing the prospectus it is sent

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to the sec tio you know kind of read through

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it Bear in mind the sec isn't in the business

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of deciding how folks should invest their money Rather they

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just determine if there's been sufficient disclosure especially regarding the

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risks with the sec will send back the prospectus to

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lawyers with their comments Some of those comments will be

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nit picky stuff like you need a comma here while

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others will be more substantial like esso all that offshore

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revenue Where did it come from Right next number eight

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approved preliminary prospectus while lawyers will send the revised prospectus

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back to the sec where it might generate yet more

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comments Two o three o for o but if the

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sec is satisfied they will send the prospectus back with

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a letter to the effect that it has approved it

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as a preliminary prospectus also known in the trade as

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a red herring because there must be language on the

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face of the document Colored red is surprise surprise indicating

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that this is not a final prospectus It turns black

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when it is all right Number nine marketing Once the

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red herring is in effect the underwriter can start drumming

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up interest in the company The securities act of nineteen

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thirty three requires at least twenty days to elapse beginning

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with the date that the red herring is effective until

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it can actually sell securities That is the company as

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have the red herring out there for three weeks basically

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Allowing investors to really look at it digest it Think

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about it and all that stuff before it can actually

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sell securities to the public Well silver slacks will start

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the roadshow process This process works exactly as it sounds

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The underwriter and assorted senior management of the sauce company

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most definitely including mr wu will travel around the country

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in the world wearing coats and ties Handing out saw

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samples to present the story Two groups of potential investors

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like mutual funds and hedge funds and pension funds and

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other kinds of funds Alright next number ten holding period

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it's Not about cuddling after lovemaking Although it could be

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well after twenty days And assuming that the s e

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c hasn't issued any further comments by pio is ready

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to go Why twenty days Well maybe there were lawsuits

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waiting to crawl out of the woodwork Maybe there were

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claims by others that the sauce was in fact their

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idea not bobby's Maybe a distributor felt wronged by the

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company and was just alerted to the company going public

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And they wanted to finally be paid Not an issue

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with the sauce company But you can imagine unscrupulous companies

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Eighty years ago selling toe uneducated farmers and well those

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companies could have gotten away with murder If there wasn't

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time for the wrong to step forward ideally carrying a

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pitchfork Well that was the intent of the law anyway

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to create time and awareness for there to be fairness

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So you got a twenty days Alright Number eleven go

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team By this time the underwriter will have assembled the

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selling syndicate which is a group of other broker dealers

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who commit to selling some or all of the underwriting

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number twelve dates times and deliver bols But will the

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underwriters determine the date to sell The red herring language

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is removed from the prospectus and its gentlemen Start your

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engines time So when the sauce company first officially hired

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silver flax teo you know deal with all of this

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While the various terms and contractual language was outlined it

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is a nothing Bankers have more lawyers than companies do

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but sauce company will outline and they will have negotiated

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the spread that silver slacks will take how their fees

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will be paid What happens if the aipo doesn't happen

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for something that is clearly silver slacks Vault you know

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Like it's discovered that one of their employees leaked to

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the press that an i p o is happening before

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it was in registration And that guy is now apartment

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shopping in nairobi Because that's What happens when you leak

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at an investment bank Kidding in practice and outline will

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cover who gets what Here is well the lead manager

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on the i p o deal gets paid the most

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The syndicate partners who helps sell get less and subsequent

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agents brought on board to sell any remaining cheryl's Well

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just get a little tiny bit a tiny commission but

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there is a spread here in that if the sauce

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company is hoping to sell four million shares at twenty

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bucks each to the public the underwriting group will be

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buying them for less maybe nineteen dollars Well that buck

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spread gives four million dollars in total gross spread to

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schmeer around the partners on the deal Maybe there are

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some incremental fees the company must pay as well But

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it is the seventy six million dollars that will be

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the underwriting proceeds that the sauce company will keep Not

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the notional eighty million got it The lead manager of

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the syndicate silver slacks keeps fifteen percent or so of

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the spread off the top Then the underwriter that assumes

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the risk of re selling keeps about twenty five percent

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and the line players who actually do the direct selling

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of the shares to the portfolio managers at the funds

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while those guys keep roughly half or more all right

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Well the sauce company will file the registration statement officially

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with the sec and in the states in which it

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will sell Those securities have to sell it state well

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It will have to comply with blue sky laws which

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for that group of you with goldfish like attention spans

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to review our state regulations coined in kansas by a

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judge who was trying to protect uneducated farmers from speculating

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in business enterprise is worth no more than a few

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feet of blue sky famous phrase no it those laws

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were generally about disclosure and they require the seller of

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the securities toe have lots of it As we've noted

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silver slacks is committed to this i po as an

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exercise in raising equity capital selling stock but it could

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have been a debt offering or about a does in

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Other ways of selling stock including strategic alignments or big

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investments by a big company like general foods putting money

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into the sauce company Instead this would have been called

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a private placement by a strategic investor The shares would

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have different structures Because general foods is considered you know

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a big boy in the eyes of the government It

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doesn't necessarily need the same handholding protections as john q

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Public and private placements generally come outside of the long

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arms of the nineteen thirty three act but mr wu

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has grand plans and believes he will want to tap

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the public markets for money for a decade So having

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a liquid market out there of his securities trading all

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day long in the public is key and general foods

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while there are competitors so why would he want to

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give them any special private investor window into how great

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their businesses silver slacks and rest of syndicator committing to

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pay nineteen bucks a share regardless of whether they can

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resell some all or none of those shares And well

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that's the aipo process in a nutshell kind of makes

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you want to join the wu tang clan doesn't it

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Sorry mister will you know we were going to do 00:10:32.776 --> [endTime] that Whoa

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