See Beauty Contest.

Beauty Contest

When a company is considering an IPO, its executives typically interview a number of investment banks to determine which ones would do the best job of managing the offering and provide ongoing research reports once the company is public. The parade of investment bankers through a company's offices is known as the beauty contest or bake-off.

Best Efforts

As opposed to a normal "firm commitment" offering, in a "best efforts" offering the lead manager simply agrees to put forth its best effort to sell the shares being registered. The lead manager does not agree to fully underwrite the offering, and is under no obligation to buy shares that it cannot sell. Best efforts offerings are typically conducted by small companies unsure of public demand, and led by boutique investment banks. In addition, the book-building process may be drawn out for weeks or even months.

Blank Check Company

Also known as a Special Purpose Acquisition Company, or SPAC, this is a shell corporation that raises cash through an IPO, with the intention of acquiring a private business. If a SPAC cannot find an acquisition typically within two years, or if shareholders vote down proposed acquisitions, or if any investor chooses to redeem their unit, unit holders then receive their initial investment back ($10) with an additional interest component. Blank check company IPOs are pitched on the reputation of the management team, which will often include a few experienced dealmakers and former executives of well-known companies (industry operators). The SPAC's insiders give themselves a ~20% equity stake, the "promote," which can be worth anywhere from $10 to $200 million in the event of an acquisition. However, founders also buy enough warrants or units to cover the cash fees owed to underwriters, advisors, and the exchange (their "at-risk capital," often ~2.5% of proceeds) so that the trust is fully funded to cover all potential public shareholder redemptions. Companies that list via SPAC merger might have had a difficult time selling to investors through an IPO, though they are increasingly being seen as a viable IPO alternative. Blank checks are initially offered at $10 per unit, which includes whole or partial warrants, and sometimes a right to receive partial shares. The units then often continue to trade very close to $10 until an acquisition is announced.


When an investor places an indication of interest for shares in an IPO and receives no shares.

Blue Sky

These are state securities laws designed to protect individual investors. The phrase purportedly originated from a judge who said that the securities of a particular company had all the value of a patch of blue sky. Both companies and mutual funds are affected by state blue sky laws. However, the SEC and Congress have superseded these rules, because the rules in some states are obsolete, arbitrary and poorly enforced.

Board of Directors

The composition of the Board of Directors is particularly critical for an IPO. Typically, a board is composed of inside and outside directors. Inside directors could be management, significant shareholders, venture capitalists, vendors and relatives. Outside directors have no underlying financial or personal relationship with the company that could create a conflict of interest and are on the board for their experience, business judgment and contacts. Outside directors may own stock, but are not large shareholders. Investors should look for a board that has at least two outside directors. Typically, companies add their first independent directors in preparation for an IPO.


One of the lead investment banks underwriting an IPO. Underwriters in the syndicate can be active or passive bookrunners, though they all will have a bigger role than co-managers. In practice, the lead manager is the bank that actually runs the book-building process: collecting orders, determining allocations and setting an IPO price based on demand and management’s expectations.

Breaking Issue Price

If an IPO trades under its IPO price in the aftermarket, it is said to break price. This is not a good thing. Regardless of fundamentals, investors regard breaking issue price as a bad omen. The underwriters, one of which may be a designated stabilizing agent, will make an effort to prop up the IPO price with a stabilizing bid.

Bucket Shop

These are brokerage firms with dubious reputations. Many of these are fly-by-night operations, consisting of many brokers making cold calls to investors. These shops specialize in low priced "penny stocks", which they sell to one fool and then to a greater fool. The brokers may hop from shop to shop, just ahead of federal regulators.

Buy side

Term used to describe institutional investors and members of the professional investment community that buy securities for money-management functions. Examples include: mutual funds, hedge funds, trusts, and financial advisors.