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Is your company thinking of doing a public offering of its stock? Know anyone who is? Here's a guide to the jargon used in IPOs. Now you can "talk the talk" or at least understand those who do. Issuer - The company selling or issuing securities. Investment Bankers, a/k/a Underwriters - Securities firms that purchase and resell the securities in the public offering. Individual investment bankers often can be identified by their trademark suspenders and cell phones. Generally, the wider the suspenders and the smaller the cell phone the higher ranking the investment banker. A bow tie generally denotes a god of the securities industry. Firm Commitment Offering - Investment bankers make this "firm commitment" when the offering process is almost complete several months after the offering process begins. The commitment occurs after the investment banker believes it has pre-sold the deal to investors. For a short period of time, usually one nanosecond in length, the investment bankers own the shares in the offering before reselling the shares to investors. This firm commitment is often touted by investment bankers as a risk justifying millions of dollars in fees. Distinguished from a "Best Efforts" offering in which the investment bankers never own the shares. SEC - The Securities and Exchange Commission, a Federal agency with which all public offerings of securities must be registered. A bureaucratic goddess which investment bankers, attorneys and accountants must placate before issuers can sell shares in the public offering. The SEC holds the life of the offering, and often the issuer, in its hands. The securities industry kneels before the goddess. Road Show - A tour arranged by investment bankers for officers of the issuer, usually the CEO and the CFO, to sell securities to large institutional investors, such as pension funds, insurance companies and mutual funds. The officers of the issuer make presentations in two or three different cities each day across the US, and in some cases Europe and Asia, for a week to ten days. Conducted through a coordinated effort of jets, helicopters, limos and taxis, but unexpected events often require bicycles or snowshoes to keep the CEO and CFO on schedule. The Road Show is one reason the officers of issuers do not feel guilty about becoming rich as a result of the offering. The Road Show is often the source of the funniest IPO stories. Pricing. A game of "chicken" in which the investment bankers tell the issuer's officers that the price they had discussed for several months is much too high and the officers of the issuer pretend to be willing to kill the offering rather than accept a lower price. The pricing showdown at the OK Corral often occurs closer to midnight than to high noon. The Committee - The management group in the investment banking firm that must approve all offerings the investment bankers do. A notably quirky group that often reaches surprising decisions after the issuer has invested weeks or months of work on the deal and has told other investment banking companies it has chosen their competitor to do the offering. Often a convenient scapegoat for pricing the deal low. Beware of the Committee. The Window - A gauge for the receptiveness of the stock market to public offerings. An "open" Window means the deal can get done or will be priced high. A "closed" Window means the deal will not be done or will be priced low. Predictions that the Window will soon close to bring fear to the hearts of issuers, lawyers, accountants and investment bankers and motivate them to work 24 hours a day, seven days a week to complete the deal before the Window closes. The Window often closes as investors sober up after a period of market euphoria and realize they have invested in a large number of very risky companies. The Window opens again when investors forget their losses on earlier IPOs. Due Diligence - Like garlic was once used to ward off vampires, investment bankers, attorneys and accountants use Due Diligence as a talisman to ward off liability when the investors lose money and sue everyone involved in the offering. Due Diligence ranges from visiting a factory to ensure it exists to asking the officers of the issuer questions such as the ever popular "What keeps you awake at night worrying? What will go wrong with your company?" Due Diligence drives the clerical staff of the issuer crazy as 24 year old boy geniuses who know nothing about running a company ask for copies of every piece of paper related to the issuer's during last five years of business. All Hands Meeting - The first meeting of the working group that will do the offering, including the issuer's officers, attorneys and accountants, the investment bankers and the lawyers for the investment bankers. Often the last meeting attended by the senior investment bankers, who convinced the officers of the company they understand the company and its industry, before turning the offering process over to the whiz kids fresh out of MBA programs. Tombstone - A notice placed in financial newspapers by investment bankers to advertise their role in public offerings after completion of the deal. So named because an advertisement often publicizes multiple public offerings, each of which is framed by its own rectangular box, and resembles rows of tombstones in a cemetery. At the end of the year the investment banker with the most tombstones to his or her credit is elected the Top Gun of Wall Street. Red Herring - The nickname for the preliminary prospectus circulated to potential investors to describe the issuer and the offering before closing the deal. So named because the preliminary prospectus contains a red warning legend on its cover. Gun Jumping - Any action by the issuer of securities or its investment bankers which advertises the issuer or the offering before filing a registration statement with the SEC. Often causes despair among CEOs who plan to appear on the David Letterman show to tout their company's latest cure for cancer. Blue Sky - State securities laws. So called because states enacted these laws to limit fraudulent securities sales practices that enable brokers to sell the "blue sky" to investors. Lock Up - An agreement investment bankers require the officers and major shareholders of the issuer to sign to prevent them from selling their shares in the issuer for a defined period of time (90 days to 2 years) after completion of the public offering. An entrepreneur whose company has gone public, and is a millionaire on paper, will tell you he is too poor to buy lunch because he cannot sell his stock due to Lock Ups. Green Shoe or "The Shoe" - An option by the investment bankers to purchase more shares than were originally in the offering; usually 15% more. So called because the first use of this extra shares option is sometimes thought to have occurred during a public offering of shares by the Green Shoe Company early in the 20th Century. Acceleration - At the end of the public offering process, the SEC magnanimously waives a 20-day waiting period to allow sales of the shares to start. This usually occurs after the issuer has been waiting several months for the SEC to act. Company officers generally find nothing accelerated about the process. Declared Effective - The long-awaited action by the SEC that allows sales of securities to occur after the issuer has sufficiently prostrated itself before the SEC and usually before the officers of the issuer die of exhaustion. Over the Wall - Issuers of securities are required to maintain the secrecy of material information from securities analysts until disclosing the information to the public. However, the opinions of the securities analyst of the investment banking firm running the public offering can make or break a public offering during the Road Show. Bringing an analyst "Over the Wall" is the disclosure of secret information to the analyst. |
