See 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.

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.

A blank check company is a developmental stage entity with no specific business plan or purpose, or one that has indicated its business plan is to engage in a merger or acquisition with an unidentified company or other entity.

Operations and Structure:

• Capital Raising: Blank check companies raise capital through an initial public offering (IPO), despite lacking concrete business operations at the time. The funds raised are typically placed in an escrow or trust account, remaining untouched until the company identifies a suitable merger or acquisition target.
• Target Acquisition: The primary objective is to identify and merge with or acquire a private company, thereby enabling the private entity to become publicly traded without undergoing the traditional IPO process. This approach can expedite access to public markets for the target company.
• Investor Considerations: Investing in blank check companies is speculative. Investors typically have limited information about potential acquisition targets at the time of investment, relying heavily on the management team's expertise and strategy.

Special Purpose Acquisition Companies (SPACs):

A prominent type of blank check company is the Special Purpose Acquisition Company (SPAC). SPACs are formed specifically to raise capital through an IPO with the intent of acquiring or merging with an existing private company. This method allows the private company to become public without the complexities of a traditional IPO.

SPAC Operations:

• Formation and IPO: SPACs are established by sponsors—often experienced investors or industry professionals—who raise funds through an IPO. At this stage, the SPAC has no operational business and serves solely as a vehicle to acquire another company.
• Trust Account: The capital raised is placed into a trust account, which accrues interest. These funds cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated.
• Acquisition Timeline: SPACs typically operate within a specified timeframe, often 18 to 24 months, to identify and consummate a merger or acquisition. If unsuccessful within this period, the SPAC is dissolved, and the funds are returned to investors.

Investment Considerations:

• Potential Benefits: SPACs can provide private companies with a faster and potentially more cost-effective route to public markets compared to traditional IPOs. For investors, SPACs offer an opportunity to invest alongside experienced sponsors and potentially benefit from the subsequent merger.
• Risks: Investing in SPACs carries risks, including the possibility that no suitable acquisition is found, leading to the return of funds without significant gains. Additionally, the success of the investment heavily depends on the sponsors' ability to identify and acquire a profitable target company.

Blank check companies, particularly SPACs, have become notable instruments in the financial markets, offering alternative pathways for private companies to access public capital. However, both investors and target companies should conduct thorough due diligence to understand the inherent risks and benefits associated with these entities.

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

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.

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.

In the realm of investment banking, a bookrunner plays a pivotal role in the issuance of new securities, such as equities or bonds. Serving as the primary underwriter or lead manager, the bookrunner orchestrates the entire process of bringing new securities to market, ensuring a seamless transition from the issuer to investors.

Key Responsibilities of a Bookrunner:

• Structuring the Offering: The bookrunner collaborates closely with the issuing entity to determine the optimal structure for the security issuance, including the type of security, pricing, and timing.
• Book Building: A critical function involves gauging investor interest and demand. The bookrunner solicits indications of interest from potential investors, which aids in setting the final offering price.
• Syndicate Formation: To distribute risk and broaden the investor base, the bookrunner often forms a syndicate of underwriters. While the bookrunner leads this group, syndicate members assist in selling the securities to their respective clients.
• Marketing and Distribution: The bookrunner spearheads marketing efforts, including roadshows and presentations, to generate interest and ensure the securities reach a wide audience of potential investors.

Active vs. Passive Bookrunners:

In certain transactions, multiple bookrunners may be appointed, each with varying degrees of involvement:

• Active Bookrunner: An active bookrunner takes a hands-on approach, managing the issuance and sale of securities, maintaining and updating order books, and directly engaging with investors throughout the process.
• Passive Bookrunner: A passive bookrunner, while still part of the underwriting syndicate, has a more limited role. They may participate in the issuance but do not actively manage order books or engage in the direct sale of securities.

Importance of the Bookrunner in Financial Markets:

The bookrunner's expertise and leadership are crucial in navigating the complexities of financial regulations, market conditions, and investor sentiment. By effectively managing the issuance process, the bookrunner helps ensure that the securities are appropriately priced and successfully placed with investors, thereby contributing to the overall efficiency and stability of financial markets.

In summary, the bookrunner serves as the cornerstone of the underwriting process, guiding issuers through the intricate journey of bringing new securities to market and facilitating capital formation within the economy.

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.

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.

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.