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FAQ: Business Organizations and Transactions

How is a public offering structured?

Public offerings are a way for some companies to generate income. Public offerings may be either initial public offerings, if the company has never issued shares publicly before, or additional issues, if the company has issued shares in the past. Public offerings can also be described as primary offerings, where the company earns the proceeds from the sale; secondary offerings, where a major shareholder or shareholders profit from the proceeds; or a combination offering, where both the company and the shareholders sell shares.

At the point when a business decides it will offer its stock to the public, the business owners and officers should consult with an experienced business attorney if they have not already done so. Public offerings of securities will be subject to federal securities laws and regulations, as well as other applicable laws; thus, advice from an experienced business attorney can provide valuable guidance through this complicated process.

What is the underwriter's role in a public offering?

First, the company will seek an underwriter, an investment or brokerage firm that will purchase the shares from the company issuing them and subsequently sell them in the public offering. A firm commitment is the most common type of underwriting. In a firm commitment underwriting, the underwriter contractually commits to purchase the securities at a closing following the effective date of the registration of the shares with the Securities Exchange Commission. The underwriter will draft an offer to purchase the shares, and if the company accepts, the underwriter will own the shares after closing.

After purchasing the shares, the underwriter is responsible for marketing the securities so that it can sell them. Depending on the size of the public offering, the underwriter may form a group of other brokerages to help market the sale of the securities.

What is the issuer's role in a public offering?

The company seeking to go public, called the issuer, will issue a prospectus. This prospectus will detail information about the company and its potential so that interested parties can review it. The prospectus may include a preliminary price for the shares. The company issuing the shares (the issuer) and the underwriter may change the price of the shares when they are offered, depending upon the market for the shares at the time of the offering.

The issuer and the underwriter will try to price the shares high enough to generate the profits that the issuer wants, but low enough that the underwriter can sell all of the shares. Most shares of an anticipated initial public offering will be purchased by individuals or entities with close relationships to the underwriter and the other brokerages that are a part of the marketing and sale of the shares. Individuals without these connections will usually have to wait to purchase shares in the company until the initial buyers sell their shares.

What will the underwriter require from the issuer and its shareholders?

The underwriter's potential for profits depends on proper pricing of the public offering and a demand for the shares. To ensure a market for the shares, an underwriter could require lock-up agreements with officers, directors, selling shareholders and other large shareholders. A lock-up agreement provides that the owner of the shares agrees not to sell his or her shares for a period of time (usually 180 days) after the effective date of the registration statement. Since the underwriter will be the only seller of shares for a certain period of time, it is more likely that the underwriter can successfully sell all the shares in the public offering.

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