Going Public 465The other kind of under writing is a “best efforts” under writing. This is,
literally speaking, not an underwriting at all. The investment bankers agree, as
agents of the company, to sell such number of shares for which they can actu-
ally find buyers. Such an underwriting may be “all or none” which means
that the under writers must find buyers for all of the shares, or a “minimum-
maximum” offering (which may close if the under writers find purchasers for a
specified minimum number of shares). Most established under writers only un-
dertake “firm” under writings, and are entitled to receive somewhat greater
compensation under the rules of the National Association of Securities Deal-
ers, Inc. (which regulates under writer compensation) in consideration of un-
dertaking a firm deal. The under writers, even in a firm under writing, are not
required to purchase the shares until the very last moment and retain certain
abilities to abort the transaction; consequently, the practical difference to the
company between these two kinds of under writings is slight, although much
may be made of it in the marketplace.
The prospective managing under writers all propose to do the same thing:
organize the entire process, establish a timetable, and assign tasks to the vari-
ous players; review the company’s drafts of its filing with the SEC (which
consists of a “registration statement” in two parts, the longest part being the
“prospectus” which describes the company and its prospects and risks, and the
shorter part being a Part II which contains other technical information); orga-
nize and conduct several meetings of the going public team, focused on per-
forming “due diligence” (an examination of the company to make sure that all
material facts are uncovered and disclosed), and on reviewing in detail the
contents of the prospectus to make sure that there is no inaccuracy or material
omission; gather other investment banking firms as part of a syndicate of un-
der writers or selling group so as to achieve a broader distribution of the shares;
and find buyers for the shares.
The team considers several factors in discussions with prospective manag-
ing under writers:
- The value that each under writer is willing to place on the company, and
the discount that the under writers propose in making company shares at-
tractive for public purchase. - The recent track record of the under writer, based both on general repu-
tation and on that under writer ’s success in closing similar transactions. - Whether the under writer has been able to structure prior IPOs so that
there was a sufficient “aftermarket” for the shares, preventing the price
from collapsing. - The experience of other companies which have gone public through
that under writer, as gathered from conversations with CEOs of those
companies. - The degree to which the under writer seems capable of placing some of
the shares in the hands of larger “institutional” purchasers, so as to pro-
vide some stability in the stockholdings of the company.