A Basic Understanding of Initial Public Offerings SummaryCreating IPOs ……………………………………………………………………… …… ………… 2Contract ……………………………………..……………… 2Structured agreements ……………. .................................................. 2Insurers ………………..…………………… 2Securities and Exchange Commission (SEC) ……………………………………… 2Registration statement ……………...… ………… ………………… 2Survey ……………………………...…………3Prospectus …………… …………..……………… 3Herring red …………………. …………………… 3Road Show ……………….………………………… 3Price ………… ……...………………………… 3IPO Assignment …… ...……………… …………… 3 Institutional investors ……………………… 3 Individual investors ………………… ………...…………………… …...…………...……...……...……...……...……...…………...…… …………… ……… 4Key elements ……………..…...………………………… 4Blockout period …………… …………………....……………… 4Flip …………...…………...…… ……………… 4General IPO Basics …………...…………………..……… … 5Form …………...………..………………..………… 5Categories …………… …....…………………..………… 5Reasons to list on the stock exchange …………...…………………… ……………………..……… 5The Internet boom …………...……...……… ………..… ……… 6References …………...……………….……..………… 7A Basic Understanding of Initial Public OfferingsInitial Public Offerings (IPOs) are common ways with where small businesses can grow and expand by increasing their availability of capital. Initial public offerings began seeing a sharp rise in popularity in the late 1990s. As a result of the growing popularity following the dot com explosion, the term "IPO" has become a household name. To understand how IPOs work, it is best to first know how IPOs are created. IPOs are created by underwriters. The first step in creating the IPO is hiring an investment bank and negotiating a contract. The contract will indicate the type of securities (stocks or bonds), the amount of capital to be raised and the details of the actual subscription agreement. The company and the investment bank determine the structure of the contract. There are two different types of structured agreements. The first type of structured agreement is the irrevocable commitment agreement, in which the underwriter guarantees that a certain amount of capital will be raised. This is done by purchasing the entire offering and reselling it to the public. The second type of structured agreement is the besteffort agreement, in which the underwriter will sell securities for the company but does not guarantee the amount of capital that will be raised. To protect itself with IPOs, an investment bank often forms an underwriter syndicate. When a syndicate is formed, one lead underwriter will be responsible for the syndicate, while the others will each sell a portion of the issued securities. Once a contractual agreement is reached, the investment bank files a registration statement with the Securities and Exchange Commission (SEC) (IPO, 2005). The registration statement contains information about the offering itself along with other information about the company, such as the company's financial statements, management background, any legal matters the company may be involved in, insider holdings, and where the capital raised within the society.