Initial Public Offering: A Case Study

1. The IPO process is characterized by information asymmetries. Explain how these asymmetries may be reduced through the book-building process.
Initial Public Offering refers to the issuance of a company’s shares to the general public for the first time. The move from private to public offers several advantages to companies in terms of greater liquidity, access to new sources of funds, increased brand recognition and motivation for employees (Vernimmen, et al., 2011). Along with the various benefits, going public involves certain financial costs, such as upfront fees, insurance costs etc., and entails disclosure requirements on the company.
However, the IPO process is quite complex and can take up at least six months. It involves three major participants

• The aggregate market value of publicly-held shares must be US$ 40 million for IPOs, carve-outs and spin-offs. The aggregate market value of publicly-held shares must be US$100 million for all other listings. This calculation is based on floating stock. The closely-held stock and restricted stock of 10% or more is excluded from it.
• The company must have at least US$ 200 million in global market capitalization.
• The company is to have at least 400 round lot shareholders or 2,200 total shareholders and 100,000 shares monthly trading volume (based on most recent 6 months) or 500 total shareholders and 1,000,000 shares monthly trading volume (based on most recent 12 months)
The tests for domestic companies are:
• Earnings Test
Issuer must have aggregate pre-tax income for last 3 years of US$ 10m and a minimum of US$ 2m in each of the most recent two financial years
Or
Issuer must have aggregate pre-tax income for last 3 years of US$ 12m, minimum of US$ 5 million in the most recent year and minimum of US$ 2 million in the next most recent