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Initial Public Offerings are one of the most efficient and widely-used methods by firms to raise capital to grow. There are several reasons why a firm might decide to get listed on a stock market, but most often, it’s a capital constraint from internal resources.
And that’s what prompts it, if it’s a profitable firm, to ask for the public to invest in it. It’s a bit like the predecessor of crowd-funding. Still, it has favoring consequences which can be extended, such as widespread publicity, liquidity of funds for capital, and the option of distributing employee stock option as an incentive, among many others.
IPOs can be viewed as an auction of a share of a company’s ownership. It’s the beginning of the process of a company said to be “going public.” IPOs begin with the company announcing going public and end in the listing of that company on the stock market.
It’s a long process in-between, wherein the firm in question designs a prospectus sharing all the details of the public offering, namely material facts and figures on the financial soundness of the company, its history, its business and prospects, the value it can offer you for your money, and details of the number of shares and the price they’re being offered at.
The New York Stock Exchange is one of the most coveted places for firms to get listed. It’s one of the highly recognized and traded platforms in the world. The NYSE has a state-of-the-art price discovery mechanism, supports a variety of financial instruments, is largely digitized, and supports newer trading methods, such as stock market API, and so on.
Other than just business, listing with the NYSE is a mark of prestige, and a ticker on the New York Stock Exchange provides tremendous publicity.
The IPO Process
Initial Public Offerings include tedious hours of drafting, redrafting, publicity, subscription, allotment, culminating in the company being listed on the NYSE.
The whole process can be broken down into simple steps:
- Taking the decision: This refers to the moment when the company’s board decides to go public.
- Government Notification: The company then has to notify the United States government about its decision to be listed since it is going from private to public. The concerned body for this is the Securities and Exchange Commission. Relevant details such as company business, financials, the organizational structure, owner information, and legal status have to be duly disclosed.
- Publicity: The company sells its stock initially by publishing a prospectus with all its background, plans, and predicted returns to investors.
- Price Setting: The stock price is set the night before it’s due for listing on the NYSE. The price is calculated, taking into account public interest for the stock and the number of shares offered. The company receives the money from investors, and investors, in turn, get the stocks. A part of these allotted stocks is set to be traded the next morning.
- Unique Price Discovery: Before the company’s shares are traded, a unique price discovery system, called the Designated Market Maker, is implemented for accurate price discovery. The DMM is a relatively new feature offered by the NYSE. They carry out an “auction” of the listing company’s share lot, gauging investor interest on the floor. The DMM is considered to provide a human touch to the price discovery process, intermingling with traders on the floor. Most of the trading nowadays can be done by using trading bots.
- Beginning of Trade: The auction indication is updated minute-by-minute before narrowing it down to a single price. The stock officially starts trading on the New York Stock Exchange.
Requirements For A Listing On The NYSE
There are thorough regulations that have to be met if a company is looking to get itself a place on the NYSE ticker. Domestic and foreign firms have somewhat different criteria but is more or less the same. These regulations are to be followed meticulously, and not adhering to them can lead to heavy legal trouble.
Companies listing via IPOs, or Initial Firm Commitment Underwritten Public Offering, have to clear either the Earnings Test or the Global Market Capitalization Test.
As per the Earnings Test, minimum pre-tax earnings, after accounting for minority interest, amortization, and equity in earnings or losses of investees, must equal 10 million dollars in the past two years, with a minimum of 2 million dollars in both the years.
The Global Market Capitalization Test requires at least 200 million dollars in global capitalization, adjusted for other items and acquisitions.
The NYSE relies on the listing company’s underwriter’s written word to represent the anticipated value of the listing company’s offering to determine whether it complies with the listing standard or not.
The listing standards demand that a company show that its publicly-held shares’ aggregate market value is at least 40 million dollars. The price per share must not be less than 4 dollars a share. Else the company will not qualify to be enlisted.
Companies hoping to make it to the NYSE must have shareholder numbers above 400, each holding more than 100 shares and at least 1.1 million of publicly traded stock.
Standards for non-domestic firms trying to get listed on the NYSE are even more stringent. For a non-US firm, the minimum Earnings Test aggregate is not less than $100 million in the preceding 3 fiscal years, with less than $25 million of earnings in two consecutive years.
They must also have 5000 shareholders worldwide, with 2.5 million publicly held shares with a combined market value of 60 million dollars.
The New York Stock Exchange is one of the busiest share markets globally, conducting trades worth billions of dollars each day. To get listed on the NYSE is prestigious and a mark of success. However, an IPO on NYSE is contingent upon stringent requirements for earnings and distribution.
Bonus video: The IPO Process
Thank you for reading!