Primary and secondary shares
| Primary (new shares) | Secondary (existing shares) | |
|---|---|---|
| Who gets the money | The company | Selling shareholders |
| Effect on existing owners | Dilution | Reduced stake, no dilution |
| What investors look for | Clear use of proceeds | Reasonable size, continued commitment of sellers |
Most IPOs combine both. A deal that is mostly secondary can be read as insiders cashing out, so sellers typically retain a substantial stake and accept lock-ups.
Offer size and free float
- Liquidity: the free float must be large enough for investors to build and exit positions.
- Index eligibility: index providers apply free float and liquidity screens.
- Venue rules: many venues set minimum free float levels; some regimes have lowered them recently. Check the current threshold.
- Demand: an offer that is too large for the available demand weakens pricing.
- Control: owners may want to keep a controlling or blocking stake.
The offer structure calculator shows proceeds, dilution, free float and market capitalisation for any mix and price.
Tranches
- Institutional offering: usually the bulk of the deal, bookbuilt with qualified investors, often including private placements abroad.
- Retail offering: shares for private investors, possibly with priority allocation or preferential terms. Requires a public offer and an approved prospectus in each country where it is marketed.
- Employee offering: shares for staff, sometimes at a discount or with matching shares.
- Directed shares: a reserved portion for friends and family, customers or partners, depending on the market.
Cornerstone and anchor investors
In some markets, cornerstone investors commit before launch to buy a fixed amount at the offer price, often with a lock-up. Their names and commitments appear in the prospectus. They provide visible demand and price support, but take part of the offering off the table for other investors.
Greenshoe and stabilisation
The over-allotment option, or greenshoe, lets the banks sell more shares than the base offer, typically borrowed from existing shareholders. In many markets it is capped at a percentage of the base offer, commonly up to 15%.
After listing:
- If the price falls below the offer price, the stabilisation manager buys shares in the market to support the price and returns them to the lending shareholders. The greenshoe is not exercised for those shares.
- If the price stays at or above the offer price, the banks exercise the greenshoe, buying the extra shares from the company (new shares) or the shareholders (existing shares) at the offer price.
Stabilisation is permitted only within strict rules, for a limited period after the start of trading (in the EU up to 30 calendar days), with public disclosure of the stabilisation activity.
Lock-ups
Lock-up agreements prevent the company and existing shareholders from issuing or selling shares for a period after the IPO without the banks' consent.
- Company lock-up: usually restricts new share issues, with carve-outs for employee plans and sometimes acquisitions.
- Selling and major shareholders: commonly around six months; longer for founders and management in many deals.
- Staggered releases or performance-based early release are used in some markets.
Investors watch the lock-up expiry date: the potential supply of shares can weigh on the price.
Use of proceeds
Be specific: debt repayment, capex programmes, acquisitions, R&D, working capital. Investors want to see that new capital earns a return. Disclose order of priority and what happens if the offer is smaller than planned.
Underwriting
- Firm commitment: banks buy the shares from the issuer and resell them; in practice they commit only after the book is built and the price is set.
- Best efforts: banks sell what they can, without committing to buy.
The underwriting agreement contains representations and warranties by the company, indemnities, conditions precedent and force majeure clauses that let banks withdraw in extreme market events before closing.