An initial public offering (IPO) means when a private company converts its shares to sell to the public for the first time. The subsequent sale of shares by companies to raise money is called a “Public Offer”.
Funds raised from going public through an IPO are often used to finance business expansion or repay money borrowed when starting the business or in some cases used to exit founding shareholders of the business who want to reduce the size of their ownership.
A company that plans to conduct IPO does hire an underwriting bank or brokerage firm to register and disburse shares. The underwriter works with lawyers, accountants, and Securities and Exchange Commission (SEC) to create a financial profile of the company. Â
Afterward, the company registers its profile with the SEC and gets permission to go public. When this process is complete, the underwriter gathers several banks and brokers to sell shares in the IPO.Â
Dearth of IPO: Initial Public Offering market activity has not been as vibrant as it used to be for some years now in Nigeria as some firms that, hitherto, would have floated an IPO have continued to gauge the market pulse following the market crash in 2008 and volatility in the economy.Â
- The IPO market recorded the highest boom between 2007 and 2008; that was before the global market witnessed a financial crisis, in which Nigeria was not insulated. From 2016 to date, the primary market recorded unimpressive activities on IPOs.
- However, as the activities have started picking up in the capital market and investors regain confidence, as well as issuers beginning to access the market again, analysts expect to see renewed activity in the IPO market.
- Regulators are also coming up with innovations that will facilitate the market, one of which is the introduction of electronic IPO which MTN Nigeria recently tapped and offered a total of 575 million ordinary shares worth N97.18 billion public offer to retail investors.
- Any time a company comes to the market for public offering, it is always well publicised and on the website of the stock exchange.Â
How to subscribe to an IPO
Speaking to Nairametrics, the Vice-Chairman/CEO of Capital Assets Limited, Mr. Ariyo Olushekun, and the Chief Executive Officer of Wyoming Capital and Partners, Mr. Tajudeen Olayinka listed the benefits of electronic IPO to include expanding the outreach of IPOs, promoting the culture of keeping stocks in a book entry form, expediting the IPO process and making it easy to use.Â
They however listed below steps to follow to invest in IPO:Â
Analyse the company when the offer opens: Conduct a fundamental analysis of the company, look at its profitability, and liquidity management, and leverage the company if it is in a position to pay debt and make profits.
- Also, determine if you want to make a short-term profit by selling the shares as quickly as possible or hang onto the shares and see how the company performs going forward.
- Either way, knowing your approach is crucial before making a financial commitment.Â
Take an investment decision: Determine if you want to invest or not, if the company meets your investment appetite then approach your broker to open an account which will be a CSCS account if you don’t have any before.Â
Fill out the application form: Fill out the application form for subscription with your CSCS number, pay for the number of shares you have applied for, and submit it to the broker, you can also collect the application from your bank, fill and return it to the bank.
- If you are computer literate, you can download the application form on the NGX website or that of the issuing house website, fill out the form and submit it online.Â
- Being computer literate is required nowadays since most companies across the world now undertake digital offerings, the first recorded in Nigeria was MTN Nigeria’s recent public offer that was delivered via a digital platform.   Â
Wait for the allotment: After the application closes, the receiving agents will make their returns so you wait for the allotment to be announced, Allotment will be made to you by the issuing company, it can give you all the shares you apply for or part of the shares you applied for.
- Any value of the shares that were not allotted to you will be refunded to your bank account.Â
Your shares posted to CSCS accounts: The shares allotted to you will be posted directly to your CSCS account. With this, you are now a shareholder of the company.
- The CSCS statement showing the shares allotted to you is prima facie evidence that you are now one of the owners of the company waiting for a return on your investment.
- With the introduction of the e-dividend system of payment, you will also have to fill e-dividend mandate form after filling out the form for the allotment of the shares to enable your incoming dividend paid directly to your bank account when due.Â
Advice: As trading stocks is risky, IPOs are not an exception, there are inherent risks that you can consider before investing in an IPO that will help you realize if it is a good investment option for your portfolio and can help you achieve your investment targets.Â
- According to Olusheku, every instrument is risky, it is for the investors to do their research and analysis very well to know when and where to invest, that’s why it is important to consult brokers to help make a good investment decision.Â
- In the same vein, Olayinka said that investing in IPOs could be challenging as share value can quickly rise or shrink after the listing of shares.
- He advised investors to do extensive research before participating in an IPO and also find the right financial advisors that will help them take savvy investment decisions.Â
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