4. Choosing Your Investment Banker 31

In any case, it is likely that you won’t know the actual pricing of your offering until the day before it becomes effective and the underwriter’s agreement is signed. Until that point, the underwriter is not obligated to conduct the offering at any previously mentioned price or price range. Even though underwriters set the price at which the stock is finally offered, they do not control the price. Your underwriter cannot make a $10 stock sell and continue to sell in the after-market at $15; the market is too sophisticated to allow that kind of overvaluation.
The final question involves just how much of your company you will sell. This is largely dependent on your company’s needs for the proceeds, market conditions, and the company’s market valuation. As a general practice, however, companies sell 15 percent to 40 percent of the post-IPO outstanding shares. This tends to be influenced by a variety of factors, including selling enough shares to justify the expenses and interest the underwriter, while not selling too many shares, as this could cause excessive dilution, be perceived as a bailout, or create problems with state Blue Sky laws.
Timing, as mentioned earlier, is of the essence in your IPO. Good underwriters are masters of timing: they are experienced in avoiding seasonally slow periods and, more importantly, finding a “window” in the market, the most advantageous time to make a successful offering at the best price. When this “window” opens, it generally places enormous time pressure on everybody. At this point, the primary concern of your entire team should be to exercise extreme care and due diligence to ensure that such pressure does not result in failure to make proper disclosure.
After-market support
After all that work has been done and your IPO has succeeded, there’s still more work for your underwriter to do. Competent after-market support entails providing research data on your company and its competitors to the financial community as well as financial and business advice to you. A quality road show should leave an unsatisfied demand level that will further help the after-market support and performance of your company’s stock.
The quality of the firm you select and its ability to take large positions in your stock is important to supporting the after-market value of your shares. The underwriter’s after-market support may come into play shortly after the IPO, should speculators jump on the issue hoping to “flip” it or turn it around and sell their stock quickly at a profit. If too many people sell their shares and flood the market, the stock’s price may fall below the offering price. If this happens, the underwriter must have the financial resources to buy the stock and, if necessary, hold it until the stock’s price rises.
SEC rules permit underwriters to offer and sell to the public more shares than they are contractually obliged to buy (an “overallotment”). The underwriter may take advantage of this provision to stimulate demand in the after-market or to help maintain an orderly market for a “hot” stock. To stimulate demand, the underwriter sells shares directly to investors. To cover this short position, the underwriter will enter a bid to buy the stock in the after-market, which helps support the price.

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