Going public can provide an opportunity to raise funds for businesses and the possibility of increased value for investors. In this process, several aspects need to be considered, including IPO guarantees.
They help determine responsibilities and the division of risks among those involved in the IPO. As a result, guarantees help both ventures and investors, depending on the types and their respective characteristics.
Want to find out what the main types of guarantees are in an IPO? Keep reading and see what the possibilities are!
How does an IPO work?
A first public offering acronym, an IPO is the first public offering of a fund or company to the stock market. For companies, it is the company’s first time on the market and means shares will be available for sale for purchase and resale by investors.
From the company’s preparation and approval to the share reservation and price setting, the initial public offering (IPO) process consists of multiple steps. To make everything possible, the business relies on the support of a financial institution until the first trading session on the stock exchange takes place.
One of the subscription stages of the IPO is the stage of being a bridge between the company which opens its capital and the investors who join the offering. The intermediary institution performs the task of carrying out this procedure.
It is also worth noting that the objective of a company that goes public is to trade all of the securities issued on the primary market . Thus, through this procedure, the company raises funds based on the price set for the assets.
What are the guarantees in an IPO?
In addition to knowing how an IPO works , it is important to understand that there are certain guarantees provided for in this process. These are offered by the financial institutions that are responsible for executing all the steps until the shares are launched.
With this, the guarantees are chosen and contracted by the company that will open its capital. To this end, the interests in the process and the results that can be obtained are considered. The definition also depends on the intermediary, who determines the level of risk that he is willing to assume in the process.
Types of guarantees in IPO
Since companies’ needs are different, there is more than one type of guarantee that can be offered by the financial intermediary in an IPO. Each option provides for different responsibilities and performances — relevant factors that are evaluated for the decision.
Below, see the main types of guarantees in IPOs and understand how each one works!
Best efforts
The best efforts guarantee is also known as underwriting. When it is offered, the intermediary institution undertakes to use its best efforts to sell the shares made available by the company that will go public.
Therefore, the company performs the necessary steps for observation and looking for investors. Nevertheless, its obligation is limited. If there are part of the shares that are not sold, the institution does not undertake to subscribe the shares in the market.
Firm guarantee
The other option provided in the IPO is the firm guarantee. It is also referred to as firm or pure underwriting. This implies that the financial intermediary commits to placing the shares and selling them in the market. Subsequently, according to the target price of the shares, the company is assured of receiving the sum equivalent to the issuance of the shares, as specified.
If the sale does not occur as expected, the institution will assume the loss. For this modality to be possible, there must be a clear contract with the conditions that delimit the participation of the company and the intermediary.
Residual warranty
In the residual guarantee, there is a kind of division of risks between the company that opens its capital and the financial intermediary.
In this case, the responsible institution undertakes to collaborate in negotiations with investors until a defined deadline. After the agreed period, the financial intermediary can decide whether to return the remaining shares to the company or subscribe them.
What are the advantages of guarantees in an IPO?
The existence of guarantees in the IPO process can generate benefits both for the companies that open their capital and for the investors who participate in this opening.
Check out IPO’s benefits!
For the company
Depending on the guarantee offered to the company, there is a reduction in the overall risks of the operation. With a firm guarantee, for example, all risks are assumed by the intermediary institution — which can facilitate the process of opening capital for the business.
This type of guarantee is also beneficial for the company because it guarantees the collection of funds within a defined period. This can make the operation more advantageous because there is less risk of generating losses for the business.
Depending on the guarantee offered, this is a way for the company to invest in its expansion or in strengthening its activities. With firm underwriting, for example, there is greater predictability regarding the values obtained through the procedure.
For the investor
Investors can also benefit from IPO guarantees. For example, it is possible to assess the prospects of the intermediary institution for the public offering . In general, firm guarantees are offered to companies with higher levels of credibility and potential to receive investment.
Furthermore, reducing risks for the company can favor the appreciation of the investment. With the subscription carried out by the intermediary business, the company can make improvements that tend to be reflected in the appreciation of the securities.
Therefore, the type of guarantee is information that can complement the investor’s analysis of the IPO. Since company data tends to be scarcer at this time, compared to companies with a consolidated history, the guarantee can serve as additional guidance for decision-making.
Now you know what the main guarantees are in an IPO and how they work. As an investor, it is interesting to pay attention to these modalities to obtain more information about the company and the public offering, which will support decisions based on your strategy.