An Initial Public Offering (IPO) is the ways by which privately held companies transform into publicly traded companies. IPOs are in most cases given by smaller, companies looking for the capital to expand, but can also involve large privately owned companies intending to become publicly traded.
(a) The underwriter is defined as an investment bank that recruits IPO specialists. They serve the following roles:
1. They make sure that the firm meets all the regulatory requirements, such as filing with the respective bodies and depositing all the fees, and performs all necessary financial data accessible to the public.
2. Meets with large prospective buyers of stock, i.e. Mutual funds and insurance companies who possess huge sums of money to invest. The underwriter picks the pulse of prospective buyers and then suggests an IPO price to the firm. An excessive price may render the firm with unsold stock, whereas a price which is too low will imply forgone revenue from the stock sold (Saunders and Walter, 1994; Benston, 1994).
3. Gives an opportunity to the firm to sell a definite quantity of stock during the IPO process.Such sales must carried out with caution, because unfortunately dumping a lot of shares can move the prices down, demoralizing both the issuer and the underwriter.
(b) The role of an originating house and a syndicate
An Originating House is majorly a firm that controls and manages the underwriting process while a syndicate setting up a variety of brokerage firms to sum up the underwriting and market selling of the securities.
One of the roles of forming a syndicate is that it provides an opportunity for more brokerage firms to take part in hence raising the chances of more buyers into the securities hence limiting the risks of loss while at the same time increasing the potential of making a profit. On the other hand an originating house serves the role of underwriting and selling of any new issue of stock to the entire general public (Booth and Smith, 1986).
Issue price refers to the price at which a new security shall be divided equally to the public before the new issue trading on the secondary market. Also referred to as offering price.Underwriters analyze various factors when trying to evaluate a security's offering price. Arguably an investment bank should accurately monitor the worth of the securities and the underlying firm, contributing finances for the issuing company and also selling the securities to investors for a reasonable price to be given.
Public offering refers to the selling of equity shares or any financial equipment by a given organization to the public so as to contribute funds for the growth, expansion and investment of the firm (Investopedia, 2014). It is usually associated with many risks, for example various businesses that are going public for the first round are very new hence in case someone invests public offering stocks he/she is most likely to bear part of the burdens of the company (Chen and Ritter, 2000; Hansen, 2001).
Also due to the fact that the company is new, there are chances of insufficient information about the company among the general public. The in availability of adequate information in itself is a major risk the public. When a firm goes public they have to submit a documentation to the Securities and Exchange Commission (Financial Web, n.d).
Also when one ventures into investing in a business going public there can be fears of a long holding time hence leading to the firm performing dismally since its new.
Securities and Exchange Commission gives a provision of the risk factors that a firm may face and how to handle them. Like in any business transaction there may be a loss or a profit and the foreign exchange combines not only the inflational process of the main nation but also the inflation itself (James, 1987; Lummer and McConnell, 1989).
The utmost goal of any risk evaluation is to find out the risk and look for its amicable solutions. One way of doing this is by avoiding the risk. Although not advisable a firm has to accept the risk and look for ways of avoiding it. The other way is to control losses in which one tries to control the frequency of risk occurrence. The aims of risk management include stability of earnings and continued growth alongside social responsibility (Chen and Ritter, 2000; Hansen, 2001).