Every upcoming IPO company will provide a comprehensive Prospectus, typically spanning about 150 pages. While understanding the content of which you’re going to put money into matters the most, read more for some crucial information that could really help narrow down your search and make informed decisions during an IPO process!
What is an IPO?
An “Initial Public Offering” or IPO, is a period when a private company offers its shares to the public for the first time, allowing both individual and institutional investors to purchase ownership portions of the Company. This transition to public status involves the company listing its shares on a stock exchange, like the Australian Securities Exchange (ASX), facilitating trading among investors.
IPO Process
The IPO process in Australia involves:
(1) Preparation: The company decides to go public and prepares all the necessary documentation, financial statements, and disclosures required by regulatory authorities.
(2) Engaging Advisors: The company often hires investment banks, underwriters, and legal and accounting firms to assist in the IPO process. These advisors help with pricing the shares, regulatory compliance, and marketing to potential investors.
(3) Price Determination: Based on investor interest and market conditions, the company and its advisors determine the IPO price for its shares.
(4) Regulatory Approvals: The company needs to gain regulatory approval from relevant authorities, such as the Australian Securities and Investments Commission (ASIC).
(5) Prospectus: The company creates a Prospectus, which is a comprehensive document that provides details about its business, financials, risks, and future prospects. This document is shared publicly.
(6) Investor Marketing: The company conducts marketing efforts to present its investment proposition to institutional investors and retail investors.
(7) Allocation of Shares: Once the IPO price is set, the company has the authority to choose the recipients for its share offering. This might include customers, institutional investors, or the general public.
Eligible applicants can fill out the application form in the prospectus or through a broker if the broker is involved in the IPO.
(8) Listing on the Stock Exchange: On the Listing day (usually scheduled on the Prospectus), the company’s shares are officially listed and begin trading on the ASX.
(9) Post-IPO Activities: After the IPO, the company becomes a publicly-traded entity, and its shares can be bought and sold by investors on the stock exchange. The company is now subject to ongoing regulatory and reporting requirements.
Things to look for when investing in an IPO company:
As an investor, participating in an IPO means we need to carefully assess the company’s financials, prospects, and risks before making an investment decision, such as:
(1) IPO Prospectus: Review the IPO Prospectus, While not infallible, don’t skip this essential step. It lays out the company’s potential but also its challenges and how IPO funds will be used. For instance, if the funds are intended to repay loans or buy equity, it might be concerning as such signs suggest financial strain.
On the other hand, money for research or expansion is promising. Watch out for overly optimistic earnings forecasts. Over-promising and under-delivering are mistakes often made by those vying for marketplace success, so it’s important to read projected accounting figures carefully.
(2) Business Model and Industry: Understand the company’s business model, the industry it operates in, and the potential for growth. Look for industries with a clear path to profitability and long-term prospects, not those with just a short term hype.
(3) Financial Performance: Examine the company’s financial records, including its earnings, profit margins, and growth rates. Look at patterns over recent years to gauge financial strength and possibilities for future expansion.
(4) Market Opportunity and Competitive Advantage: Assess the company’s uniqueness in comparison to competitors and its competitive advantage, which could include distinct technology or market positioning. Additionally, consider the size of its target market, with a larger and expanding market signalling greater growth opportunities.
(5) Objective Research: Gathering data on upcoming public companies is challenging. Unlike public companies, private ones lack detailed third-party analyst coverage. Though most companies try to fully disclose all information in their prospectus, it is still written by them and not by an unbiased third party.
Learning as much as you can is essential for making a smart investment choice. Conversely, your research might reveal that a company’s potential is exaggerated, and in such cases, refraining from investing could be the wisest decision.
(6) Risks and Challenges: Consider the potential risks and challenges the company faces. This could include regulatory hurdles, competitive pressures, or industry-specific risks. Pulling up data on risk and challenges faced by competitors of the same industry could be useful too.
(7) Use of Proceeds: Understand how the company intends to utilise the IPO funds. Seek a clear plan that matches growth goals, research, development, and expansion strategies.
(8) Valuation: Analyse the company’s valuation relative to its peers and industry benchmarks. A reasonable valuation is important to ensure you’re not overpaying for the stock.
(9) IPO Underwriters and Advisors: Research the investment banks and underwriters managing the IPO. Reputable underwriters can enhance the credibility of the offering. In general, quality brokerages are more likely to be associated with quality. It’s important to exercise extra caution when selecting smaller brokerages because they may be less-selective thus willing to underwrite any company.
Clara is a Business Reporter for The Sentiment.
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