What is an IPO?

Wednesday 23rd January 2002

Q: I have just recently become involved in the share market and have been approached by a broker to purchase IPOs. Could you please explain what format these come in - are they a registered share or security or what? Also, what happens should the company not go public? The reason I ask is that I contacted the financial advisor of the business issuing the IPOs and he advised that it was in their plans to go public but could not say when, except that it would not be in the near future. On the other hand the broker advises they will go public in the next three to four months and my initial investment should double. Could you please help?

A: From what you have told me this is not an IPO but a capital raising. An Initial Public Offering is the first time that securities are being offered to the public with the intention of listing the company on the Stock Exchange. You have not said whether or not this is a NZ company so for the purpose of answering as many of your questions as I can, I'm assuming it is. If this is not a listed company they are still required to comply with the Companies Act 1993 and the Securities Act in relation to their prospectus.

Have you been given a copy of the company's prospectus? If the company is looking to the public to raise funds they must issue a prospectus and this must be registered with the Securities Commission. If they don't intend to apply for full listed company status then they may seek to trade on the Unlisted Securities Facility. This is a grey or 'unlisted' market where brokers can trade in the shares of companies but it does not have the same rules or settlement regime of listed companies. When the company seeks a listing on the NZSE, that will be their IPO. If the shares are not going to be traded on the NZSE or even the unlisted board, how can you tell if your investment has doubled? Sounds like an investment that is too good to be true if you can double your funds in 3-4 months.

The broker who is organising the funding gets a percentage from every parcel of shares he sells. Although he will be a good source of information - in circumstances such as you have described - he may hardly be a good source of impartial advice. If you can, always deal with a broker who is a member of the NZSE. NZSE Members have to comply with the NZSE Rules and Regulations. If you are unhappy with your broker you have a governing body you can complain to and in a worst case scenario they will reimburse you if you suffer a loss due to your broker's 'dodgy' dealing. Anyone can apply for a sharebroker's licence but only members of the NZSE can trade on the NZ sharemarket.

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