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How does the IPO process begin?

On Behalf of | Jan 19, 2021 | Business & Commercial Law |

The first step of launching an initial public offering (IPO) in California is to invest in a bank. The bank you should invest in as a company should be a part of the Securities and Exchange Commission (SEC). IPO underwriters help a company determine what the initial offer price should be and what shares the investment bank will buy. When choosing an underwriter, you want to research several candidates online based on the quality of their research, industry expertise, and relationships with other banks and enterprises.

The process of initiating an IPO is extremely time-consuming because you must complete a lot of paperwork and register with the SEC. After that, you need to establish contact between the IPO underwriter and the company wherein the underwriter will buy all the shares from the company that’s issuing them and resell them back to the public. In this arrangement, the underwriter will not guarantee a specific amount of money but will agree to sell stocks on behalf of the company.

The underwriter utilizes the reimbursement clause

The reimbursement clause, which is part of the engagement letter, can cover any of the underwriter’s out-of-pocket expenses. Additionally, the company may offer the underwriter a gross spread as an underwriting discount. This works by taking the price that the underwriter paid for the stock and then subtracting that amount from the fee that the underwriter charges business and commercial law companies for the shares.

Here’s an example. Let’s say a company has 1,000 shares priced at $10. The underwriter may decide to purchase each of them for $8 a share, which means that he or she will spend $8,000. Let’s say the underwriter sells each of these shares at $10 apiece, making $10,000. Altogether, an underwriter gets a ghost spread, or discount, of $2,000.