The Anatomy of New Issues (Part II)

In a previous article, we discussed how many public companies raise money in the equity markets through the use of “bought deals.”

Due to the speed at which issues are marketed, retail investors rarely have the time for the due diligence to make an informed decision but instead rely on the expertise of their financial advisors.

In the case of a private company going public, the initial public offering (IPO) process is somewhat different because it is a comprehensive series of activities. But it still requires financial insights from investment advisors. In some cases, investors should wait before making a financial commitment in a new issue. With almost predictable reliability, every market cycle brings the get-rich-quick rumours of flipping new issues, but it’s usually better to use tried and true methods for creating long-term capital appreciation. Investment dealers help create wealth, but not everyone gets rich.

A company planning an IPO will engage the services of an investment dealer who, in turn, will perform an exhaustive due diligence process and then help create a preliminary prospectus. This will contain facts about the company, its history, underlying business, prospects for growth, and a description of its financial statements. There is always a broad statement of risk advising investors of the potential dangers and uncertainties of the company’s business. The preliminary prospectus is available from the investment dealer but is also filed at To better understand the process, ask an advisor for the names of companies that have recently gone public, and then examine the events that lead a company through the IPO process.

One company that recently went through the process filed a preliminary prospectus on February 26, 2010. A group of investment dealers formed a syndicate to underwrite the issue and market the company to the public. This process took five weeks and, through negotiations between the underwriters and the issuer, established the price and number of shares to be issued, at which point, a final prospectus was filed with the regulators and SEDAR on March 30, 2010 with a payment and delivery date scheduled for April 8, 2010.

It’s a long and exhaustive process for the issuer and the investment dealers, but the company raised $1.35 billion before expenses. According to the prospectus, the underwriters shared a commission of approximately $81 million with an option to issue more shares that could earn them an additional $12 million.


Not all IPOs guarantee investors an immediate return on their investment. Eight days after this company went public at $18, the stock closed at $13.85 leaving new issue participants with a potential loss of 23 per cent, if they sold immediately. Clues to its performance can be found in the 300-page prospectus. In addition to reading the prospectus filed at SEDAR, prospective investors should also check out the insider positions at This is the System for Electronic Disclosure by Insiders and provides a record of who owns what.

According to the prospectus at SEDAR, page 26 outlines the history of the company. It was incorporated on August 23, 2006 as a private company and immediately entered into an agreement to acquire the rights to buy certain oil leases from a separate private company in exchange for 20 million shares plus 19 million performance warrants at 1/10th of a penny or $20,000. Eight days later, 10 million shares were issued at 10 cents per share by way of a private placement, and one day later, on September 1, 2006, it completed another private placement, issuing 82 million units at one dollar per unit. So in the first two weeks, this private company issued over 110 million shares. Of these, 17.8 million units were issued to purchase oil leases on 95,000 acres of land.

In fairness to the early-round investors and founders, the land could have been nothing but swamp land and muskrat lodges and, as a private company, there is no liquidity, but over the next three years, the private company issued another 45 million shares ranging in prices from $2.50 to $10. The money raised was used to explore, drill, and buy land to increase shareholder value, and according to the prospectus, they were very successful. However, the $1,020,000 seed money raised four years ago now has a current market value of $415 million dollars.

Obviously it’s impossible to predict the future price action of any company once it goes public, and it’s always in the best interest of everyone concerned to see the stock price go up. The difficulty lies in gauging the future demand. Factors including the size, timing, and breadth of underwriters along with the level of institutional support demonstrate why the investment dealer also highlights the risks to investor in bold face on the prospectus.

Small and medium-sized companies that are too small for the large investment dealers seek out and use the services of smaller investment dealers to raise capital. Fees on the above IPO accounted for about six per cent of the proceeds, but in the junior marketplace, the expenses can exceed 10 per cent.

Often, a pre-public company will first contact an investment advisor who will help guide the company through the process of going public. In many instances, the corporation and the investment dealers will first use private placement financings prior to its public debut. There is an entire field of investment dealers in Vancouver, Calgary, and Toronto who work in this sector. Rules are stringently enforced regarding the placing of private placements and require investors to qualify under specific criteria. 

With smaller companies, economies of scale work against the local investment dealers. They cannot charge a $2-million fee on a $5-million financing.

The dealer still has to perform a mountain of due diligence so they charge a nominal fee and commission on the initial financing but can increase their compensation through the use of investment units called broker warrants. These warrants allow the investment dealer to buy stock at a price close to the IPO price until expiry, and if the stock goes up in price, the client, the issuer, and the investment dealer end up benefiting.

The IPO market can be a very lucrative source of profits but not everyone gets rich. It seems that many times, the old adage applies about success being determined by who you know, not what you know. Getting the chance to buy the right company before it goes public can lead to juicy profits. But caveat emptor, because for every success story, there are 1,000 private companies that never even go public and buyers end up owning a piece of paper suitable for lining the bottom of the budgie cage.

Steve Bokor is an investment broker with
PI Financial Corp., a member of CIPF.