IPO stands for Initial Public Offering, and it is an exciting way for companies to take their achievements public. It is a milestone for businesses, and investors take an active part in ensuring IPOs are a success. Annually, in Hong Kong, there are billions of funds allocated to new shares, and the city remains one of the top IPO investment spots in the world.

If you are an existing IPO investor or want to get started in investing in new shares, you are participating in one of the most exciting markets globally. However, there remains some ambiguity for both companies and investors on the different types of IPOs and how businesses determine their issue price.

In this article, we will go through the IPO process through the lens of both companies and investors. We will then discuss the two different types of IPOs – the book-building offering and the fixed-price offering. Finally, we will provide some advantages and risks of both types, and we aim to offer some guidance on how you can choose the one that is right for you.

IPO processes

The IPO process is a long and convoluted one – there is no doubt about that. While it may seem like an easy process from the outside, it takes months and even years of dedicated work from a company to produce a worthy prospectus, build up momentum and excitement for the company, and get their application approved. Let’s look at how the process goes – in general – from both the perspective of companies and of investors.

IPO processes for companies

Companies may take a year to go from the initial preparation stages to going public. This is a normal duration, and businesses should not worry about the timeframe.

The first step for companies is to prepare for the IPO. They should put their focus on drafting a comprehensive prospectus that the HKEX will approve. The prospectus will contain every detail about the company and how it is run. For example, it will include management operations, historical revenue, current revenue, market cap, cash flow, and more.

The company goes through multiple vetting processes and attends hearings to confirm the validity of the prospectus. They must also meet stringent criteria to be listed in Hong Kong. There are two destinations for listing in the city – the Main Board and the GEM (Growth Enterprise Market). Both boards are separate entities, and the GEM is not a stepping stone toward the Main Board.

They must also go through marketing and publicity rounds, gauge public interest, determine share prices, allot shares, and check in with every type of investor. It is a long process, and companies often require employing a lot of legal and accounting help.

IPO processes for investors

The IPO process is much simpler for investors, in comparison to that for companies. Investors go online to read up on a company’s prospectus and do their due diligence by researching well the sector and industry they want to invest in. They also participate in the subscription and allotment processes, and companies use their engagement to adjust share issue prices. When a company is first listed, investors can participate by trading and holding shares.

Different types of IPOs

There are two different types of IPOs, and the Hong Kong financial authorities have a rigorous and stringent regulatory regime for listing sponsors and listing companies.

Book Building Offering

The first of which is called a Book Building Offering. Book building is the process in which companies do not have a fixed stock issue price when they first start out. They will have elaborate discussions with other bankers, competitors, high net-worth individuals, special authority figures, and retail investors to gauge how much interest there is in their share.

Depending on how much demand there is for their stocks, the company can then determine how much the issue price of their share is. Even after determining how much a share should cost, the number may still fluctuate before the allotment. It is only during the allotment of shares to investors that they determine a final price.

Advantages of book-building offerings

The main advantage of book-building offerings is the flexibility in pricing. Companies can price their shares depending on public interest and demands, so they can raise funds that will meet their IPO objectives in a more sensible way. This also benefits investors, as they will have a more active part in determining how much a company should price its shares by how much they are willing to bid.

Risks and limitations of book-building offerings

The downside to book-building offerings is that issues may end up undervaluing their shares. This happens when the public does not receive the pre-market price discovery stage well, and reception is lukewarm. This is disadvantageous to the issuer.

Fixed Price Offering

The second type of IPO comes in the form of a Fixed Price Offering. Unlike Book Building Offerings, Fixed Price Offerings determine the price of a share at the subscription stage of the IPO process. This means they confirm – and reveal – a fixed share price early on in their IPO journey.
Companies and financial regulators determine the price of a company through the value of the business, which is based on its existing assets and liabilities. They also consider the potential of the business to flourish, and they factor in risk levels.

Advantages of fixed price offerings

The main advantage of fixed price offerings for investors is that they do not have to wait until the allotment date to know how much a share costs. This can give them a long time to make investment decisions, and they can also plan in a more effective way what they want to use with their funds.

Risks and limitations of fixed price offerings

Having a fixed price offer may end up causing a company to undervalue its shares. This is because they do not rely on the public’s demand and interest for its stocks, so they do not have the flexibility to make adjustments when there is high demand.

On the other hand, even though investors get to know the issue price early on in the IPO process, they have to make swift and clear-cut decisions early on as well. They have to pay upfront the entire share price when they place an order for the shares. The only scenario in which they receive a refund is when they miss out on allotments due to the over-subscription of a stock. This can be risky for investors who do not have a lot of capital or are unsure about the future of a share halfway through their IPO investment journey.

Determining which one is right for you

You can determine the offering type that is right for you by evaluating your needs.
As a company, if you are unsure of whether the public is excited about your listing, you may want to opt for a Book Building Offering. This will give you the flexibility to price your shares within a price band first, before narrowing it down to a single number. It will also buy you time and allow you to become more informed about the public’s perception of your company. If you are an established company and you are sure of your business’s worth, you may go for a Fixed Price Offering.

As an investor, if you prefer absolute certainty and like to plan well in advance, you may prefer to purchase shares that are issued at a fixed price. This gives you more time to formulate a complete investment plan with accurate details and calculations. If you are someone with a greater risk appetite, you may opt for subscribing to stocks that use the Book Building Offering process.

At the end of the day

Investing is a highly personal process, and you want to make sure you are investing in the way you want and that makes sense for you. You should also do sufficient research on the company in which you are investing. Do not put your money down only because you prefer the process in which they do launch IPOs. To make the most of your experience, you should be as informed as possible.
Check out SAXO bank to get started investing! Click here: https://www.home.saxo/en-hk/products/ipo.