IPOs of Nanofirms

Pre-IPO

Often, outside funding will be sought from other sources before the IPO, for a variety of reasons. Private placements are typically the first sources: initial stock issues that are exempt from registration with the SEC because they can't be resold. There is no legal limit on the number of accredited purchasers for private placements, but unaccredited purchasers are limited to 35. (Accredited purchasers include the officers of the company, certain wealthy individuals, and institutional investors like banks and pension funds.) After issuing private placements, an investment bank will usually court a venture capital fund on behalf of the company.

Venture capital funds are managed by venture capitalists who are experts in a specific business sector, which can make them a tough sell for emerging technologies. The first dotcom start-ups courted venture capitalists that specialized in the computer industry, but in retrospect, we see the business of selling computer hardware and software as relevantly distinct from the business of making money online. Nanotech has been an active area of interest for investors since the beginning of the 21st century. There are plenty of venture capitalists eager to find the right company to add to the portfolio of their fund, a limited partnership of pooled money (usually institutional investors).

The Underwriting of a Public Offering of Common Stock

The IPO follows the venture capital stage. The stocks issued in an IPO can be traded on the secondary markets—the stock exchanges—and are therefore registered with the SEC. IPOs over $1.5 million face regulation by the SEC, and state agencies generally have applicable regulations as well. The stock's registration must be made 20 days before the IPO, at which point the investment bank begins “the roadshow.” One of the jobs of the bank is to help set the initial offering price for the shares. This process is called price discovery.

The initial offering price for the shares is created by comparing the company to similar public companies in the field and looking at the performance of those stocks in the market, among other methods. The roadshow is part of price discovery and book building (tabulating investor demand for the shares). Representatives make sales pitches to prospective investors, in order to talk up the merits of the company and the stock. This spreads the word and gives the bank a sense for investor interest, and how that interest correlates with price. Nothing in the roadshow can include any data that isn't in the paperwork given to the SEC, which prevents spurious claims and helps to tone down exaggerated performance projections. Face-to-face meetings are the benefit to the roadshow—it gives the bank a better sense of demand than looking at numbers on a screen. If there is too little interest, the registration may be withdrawn. A stock is likely to do better if it goes public at a later date than originally expected, than if its IPO fares poorly.

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