Initial Public Offering (IPO)
When thinking of the US stock market, two exchanges often come to mind - the New York Stock Exchange (NYSE) and the Nasdaq. These two primary exchanges host almost the entirety of public listings, for a combined value of almost $50 trillion. Each of these exchanges have multiple tiers to allow for companies of different sizes to raise capital in public markets.
New York Stock Exchange (NYSE)
Managed by Intercontinental Exchange, NYSE is the largest stock exchange in the world and one of the oldest (established in 1792).
Over 2,400 listings are currently trading on the exchange, with a combined value of over $25 trillion.
NYSE operates three tiers of exchanges (click for expanded view - listing requirements, description) :
NYSE
NYSE Arca (ARCA)
NYSE American (AMEX)
NYSE
The first formal stock exchange established in the United States after the Buttonwood Agreement. Premier exchange with strict listing requirements. Acquired by Intercontinental Exchange in 2013
NYSE Arca (ARCA)
While equities (stocks) can be listed on ARCA, this exchange is mostly used to facilitate Exchange Traded Product (ETP) listings.
NYSE American (AMEX)
The American Stock Exchange (AMEX) was acquired by Intercontinental Exchange (NYSE) in 2008, changing their name to NYSE American. This exchange remains one of the largest in the United States per volume. Besides competitive pricing, AMEX can be favored for combining electronic designated market makers quoting obligations, and ARCA's fully electronic execution model. Specializes in small-cap listings.
Nasdaq
Nasdaq was formed in 1971 as the world's first electronic trading stock exchange. Initially a quotation system & OTC trading, eventually grew to account for roughly half of all US volume by the 90s.
Providing an electronic matching engine, Nasdaq attracted a majority of listings during the dot-com era and has since been a favored listing venue for companies in the Information Technology sector.
Nasdaq operates within three tiers (click for expanded view - listing requirements, description) :
Nasdaq Global Select Market
Nasdaq Global Market
Nasdaq Capital Market
Nasdaq Global Select Market - The Nasdaq Global Select Market has the highest initial listing standards of any exchange in the world. It is a mark of achievement and stature for qualified companies.. The most exclusive listing requirements among Nasdaq tiers.
Nasdaq Global Market - The Nasdaq Global Market lists companies with an overall global leadership and international reach with their products or services.
This exchange was created in 2006 to provide a place for companies who may not meet the Nasdaq Global Select listing requirements,
Nasdaq Capital Market - The Nasdaq Capital Markets is designed for smaller companies, and has the least exclusive listing requirements of the Nasdaq exchanges. This exchange specializes in earlier-stage companies, providing a place for offerings by companies who need to raise capital, such as SPACs.
Pre-IPO Transformation Phase
Companies preparing for an Initial Public Offering (IPO) go through a transformation phase in order to comply with regulations and prepare for investor preferences. Their ownership, organizational, and governance structure must be appropriate for public markets.
This stage typically takes around two years to complete.
A company may opt for an IPO to raise capital for business operations, the intent is outlined in filings. Also, IPOs are a system in which markets can provide liquidity to existing shareholders as well as garner interest in new investment from outside parties.
IPO Transaction Phase
Underwriters or advisors gauge investor demand and get a better sense of potential investor sentiment regarding valuation.
Companies must choose an exchange, reserve a symbol, and notify/apply to the exchange and regulators for approval of their intended listing.
Listing Types :
Traditional IPO - A company works with an investment bank(s) to raise capital. This process involves the investment bank reaching out to interested parties and selling shares at a pre-defined valuation. Underwriters will purchase the equity and sell it to those interested. Pricing is set the week of the IPO and is dependent upon investor demand. Shares commence trading after a public opening auction process.
Direct Listing - In the late 2010's, an older IPO process regained popularity. In a direct listing, the company raises capital directly to the public by offering their shares at a defined valuation and an opening auction process directly on the exchange, the day the IPO is effective, rather than using financial intermediaries to sell equity into the listing. Both Nasdaq and NYSE provide incentives for choosing this offering structure, however few companies have engaged in a direct listing over the last several years since revival of this process.
Uplisting - An 'uplisting' involves a company who has shares publicly available for trading on an Over-The-Counter market. These shares cease to exist, and their listing is transferred to a new primary exchange. Often these are simultaneous with a secondary offering (on the new exchange) that acts as the pricing mechanism for their new share structure.
Dual-Listing - The first day trading on Nasdaq/NYSE may not be the first public investment. Often times, companies will choose to offer equity in the United States to boost valuation or increase investor demand. These listings involve a company listing their shares on an American (or other) exchange while maintaining their listing on a foreign exchange.
Exchange Transfer - At times, instead of choosing a dual-listing structure, companies will terminate their equity listing in their domestic market and transfer their primary listing to the United States. Both an exchange transfer and dual-listing set pricing based on the current public valuation in their home market.
Filing Types :
Companies will file an S-1 (S-3 if already reporting company, S-4 if the transaction involves merger/acquisition) or an F-1 (or F-3, F-4, or 20-F) for a foreign based entity.
Ammendments, 8-K, 6-K or other regulatory filings are required along the way for material updates.
Investors and regulators must have the opportunity to review these filings and conduct due diligence in order to ensure structure is proper and investors can assign a valuation.
Fixed-Price / Book Building :
The traditional IPO process involves an investment bank purchasing the equity offering and selling to interested investors at a valuation determined through the offering process. Investment banks will locate pools of investors and attempt to sell equity. A book building process is different, in that an auction of sorts takes place. The company and their advisors will create a valuation and price bands (lower and upper limit) for a pricing in which they intend to offer shares at. Underwriters/bookrunners will maintain an electronic 'book' where interested parties will place bids to acquire shares.
Post-IPO Transaction Phase
Quiet Period :
Financial firms involved in the underwriting (or the company itself, insiders) are not allowed to cover new listings for a period of time (typically 25 days) to prevent manipulation/promotion and allow organic price discovery.
This means within a quiet period or 'waiting period' there are usually few analyst ratings, price targets, etc., which begin to be published at the expiration of this timeframe.
Lock-Up Period :
Certain agreements for existing shareholders are presented with an IPO.
Lock-Up expiration refers to a period of time (usually 90 or 180 days) in which certain shareholders are unable to sell equity in the company. Once the lock-up period expires, these agreements end and those shareholders have the ability but not obligation to sell their shares on the secondary market. This can have a dilute effect on shares and per share financials.
Index Inclusion :
Typically a period of time passes before new listings are eligible for index inclusion.
One such example is the Russell 2000 index, which announces their reconstruction once a year. In June, eligible IPOs are added to the index.