Companies “going public” have to make two big decisions: 1. how to price their stock for the public markets, and 2. how to list their stock on the public markets. Traditional paths for pricing involve hiring an investment bank, who discusses with its inner circle of investors about a good offering price.
Companies who decide on the traditional path choose either a fixed price offering or a book building offering. In a fixed price offering, the company sets the offering price that investors decide to either take or leave. In a book building offering, the company sets a price range at which the investment bank can collect bids from its closed circle of high net worth individuals or institutional investors, thereby determining the minimum price needed to sell all of the shares.
Unfortunately, stock price discovery happens in the off-market, which means there is no surefire way to which methodology the company uses. But don’t worry, you’re not out of options.
You can often identify which price discovery methodology (fixed-price or book building) a company chose by using process of elimination on information provided in the sections titled “Underwriting,” “Pricing of the Offering,” “Risk Factors,” or “Introduction” of the company’s prospectus or S-1 filing found in the SEC’s EDGAR database.
Uber, for example, likely used book building with Morgan Stanley and Goldman Sachs based on its S-1.
In this article, I’ve looked at SEC filings for ten companies in the United States and compiled a small database that you can use for examples. In addition, I’ll show you how to determine what price discovery methodology a given company uses at IPO from its SEC filings.
Example Book Building IPO Database (And Others)
|Company Name||Ticket Symbol||Method||Filing||Section||Page, if applicable||Link|
|Uber Technologies Inc.||UBER||Book Building||S-1||Pricing of the Offering||273||Filing Link|
|Amazon Inc.||AMZN||Book Building||S-1||Underwriters||44||Filing Link|
|Airbnb||ABNB||Book Building||S-1||Pricing of the Offering||339||Filing Link|
|Twitter Inc.||TWTR||Book Building||S-1||Underwriting||170||Filing Link|
|HCA Inc.||HCA||Book Building||Prospectus||Underwriting||S-25||Filing Link|
|Spotify Technology||SPOT||Direct Public Offering||Prospectus||Risk Factors||45||Filing Link|
|Google (now Alphabet)||GOOG||Dutch auction||S-1||Class A Common Stock||117||Filing Link|
|Tesla||TSLA||Fixed Price||Prospectus||Underwriting||179||Filing Link|
|Morningstar||MORN||OpenIPO||(424B4) Prospectus||Underwriting||103||Filing Link|
Uncover Price Discovery Method with Process of Elimination
To use process of elimination, we need to know what all the possible options are, then eliminate them one by one.
In addition to fixed price and book building discovery methods as discussed above, there are Dutch auction and OpenIPO methods. Moreover, companies may elect to avoid the discovery process altogether by listing via a reverse merger or direct public offering, in which cases a price discovery does not apply.
Our process of elimination uses company filings called Prospecti and S-1 forms. Since companies using reverse mergers or direct public offering usually do not register shares with the SEC, and therefore do not submit prospecti and S-1 forms, we eliminate them first.
Two recent examples to the contrary were Spotify and Slack, who directly listed and sold shares to the public — something very uncommon.
Most DPOs occur on a state-level rather than a federal one. To identify these companies, search for the words “resale by registered stockholders” or “resale by stockholders” in S-1 forms. Companies performing DPOs do not perform a price discovery process.
In all, we have four possible string values to look for in the prospectus and S-1:
- Fixed price
- Book building
- OpenIPO, or WR Hambrecht, or auction
- Dutch auction, or auction
From the start, we know that fixed price and book building methodologies are private information, and companies almost never share these details publicly. So we need to start by eliminating other options: OpenIPOs and Dutch auctions.
Find Out if a Company Used OpenIPO
OpenIPOs are relatively new. Companies taking this route are usually proud of it, and they will mention the words “Open IPO,” “WR Hambrecht,” or “auction” in their prospecti.
Take, for example, MorningStar. They used advisor WR Hambrecht, the pioneering IPO counseling company responsible for the methodology. If you search MorningStar’s prospectus, you will see them room of these words.
Let’s walk through it together. Open up the MorningStar S-1 filing via this link in a new tab. You should see this page:
Now you can use the on-page search function to look for our key words. On Windows, click Cntrl + F. On Mac, click command + f. This will open a small dialog box at the top of the page to search for words. From there, you can look up “OpenIPO.”
As you can see, Morningstar came out in the open about its price discovery methodology. They used WR Hambrecht’s proprietary auction methodology to go public.
However, had they done a book building or fixed price offering, we would not see any results for OpenIPO, Hambrecht, or auction. Instead, you would see significant terminology for underwriters.
Find Out if a Company Used Dutch Auction
We use the same methodology for Dutch auction. You need to search for the words “auction” or “dutch auction” with the control option. If you find nothing, then it’s likely the company used a traditional method such as fixed price or book building.
Find out if a Company Used Book Building or Fixed Price Methodology
The vast majority of companies use traditional IPOs, and the vast majority of underwritten IPOs are book building efforts. The reason for this lies in the underwriting methodology.
Big investment banks usually want to test the water among their inner circle of investors using a small auction.
This helps them price the shares low enough to make money for the bank but high enough to make money for the company.
In other words, it’s safe to assume that traditional underwritten IPOs are book building, except written indication to the contrary in the “Underwriting” section of the S-1 or prospectus. You can always find the underwriting section via the table of contents as shown in the picture below: