Stock FAQs: IPOs
General information about IPOs
What is an IPO?
An initial public offering (IPO) is the process of a company first selling its shares to the public. These shares are initially issued in the primary market at an offering price determined by the lead underwriter.
The primary market consists of a syndicate of investment banks and broker dealers that the lead underwriter assembles and that allocate shares to institutional and individual investors. Being allocated shares at the offering price is referred to as participating in the IPO. Participation in the IPO happens before the security is first traded on any of the stock markets.
- How do I find out about new issues available through Fidelity?
- How can I receive a preliminary or final prospectus?
Who is eligible to participate in an IPO at Fidelity Investments?
Eligibility for participation in traditional IPOs led by Kohlberg Kravis Roberts & Co. (KKR) is reserved for brokerage customers with a minimum of $100,000 in certain assets at Fidelity. Other providers of traditional IPOs, and other equity public offerings made through Fidelity may be reserved for brokerage customers with a minimum of $100,000 or $500,000 in certain assets at Fidelity. Auction OpenIPOs and secondary offerings made available through Fidelity are reserved for brokerage customers with a minimum of $100,000 in certain assets held at Fidelity. Members of Premium Services or customers who have placed 36 or more stock, fixed income, or options trades in a rolling 12-month period are eligible for either traditional or auction based offerings.
The $500,000 or $100,000 requirement and 36 trade thresholds will be determined weekly by aggregating all assets and trades in retail accounts which list the same name and Social Security number and are maintained by Fidelity Service Company, Inc. or Fidelity Brokerage Services LLC (excluding assets or trades maintained on behalf of any divisions of Fidelity Investments Institutional Services Company, such as 401(k) or 403(b) plan assets). Other assets may be included in the calculation at our discretion. In addition, an account in which an indication of interest is entered must have at least $2,000 in cash or fully paid securities.
Can I purchase shares of an initial public offering on margin?
Regulations governing IPOs state that new issues are not marginable for at least 30 days following pricing. Therefore, IPO shares must be paid for using cash or cash available to borrow.
Once pricing and allocation have been completed, you will be able to determine how much cash or cash available is needed to settle the purchase of the new offering. Settlement on a new issue varies by the issuer, but is typically the trade date plus three business days.
Fidelity eligibility rules require $2,000 in any account from which an IPO bid is entered.
How do I know how many shares I received and at what price?
You can receive automated pricing notification via email, text message, or Fidelity Mobile® after signing up for free Fidelity Alerts.
Customers can view the status of allocations to their individual accounts on Fidelity.com or by using the Fidelity Automated Services Telephone (FAST®) as soon as shares are allocated, typically the morning following pricing.
When can I sell my shares?
As with any investment, you are free to sell the securities obtained during an IPO whenever you determine it is appropriate for you. However, if you sell within the first 15 calendar days from the start of trading in the secondary market, it will affect your ability to participate in new issue equity public offerings through Fidelity for a defined period of time.
You will be prevented from participating in the IPO process if you are considered a flipper. The defined period of time which you will be prevented from participating depends on how many times you have flipped shares in the past:
- First time: 180 days
- Second time: 365 days
- Third time: permanent ban from participating in IPO process
How does participating in the OpenIPO auction differ from participation in a traditional IPO?
As a Fidelity customer, there are four fundamental differences between participating in an OpenIPO and the traditional process:
- The terms used for a customer attempting to participate in the offering: For a traditional deal, customers submit indications of interest. For auction offerings, customers submit bids.
- How pricing is set: At the time you place your bid on an auction offering, you will be asked to enter a limit price, representing the price at which you are comfortable owning the securities.
Your limit price will be used with all other customer limit prices to determine the highest price at which the issuer can distribute all shares offered. In the traditional model, the potential purchaser does not submit formal bids/limit prices, therefore such formal bids/limit prices are not considered in establishing the offering price.
- How shares are allocated: In the OpenIPO process, the clearing price of the issue will be determined by the limit price you enter with your bid, along with all of the other customer limit prices, to determine the highest price at which the shares can be distributed. Once the clearing price is determined, the underwriter and the issuer will establish the public offering price after taking a number of economic and business factors into account in addition to the clearing price.
If the limit price of your bid is at or above the offering price, you will receive a prorated number of the shares you requested rounded to the nearest 100, or all of the shares you requested at the offering price. If the limit price of your bid is less than the offering price, you will not receive any shares.
In the traditional model, allocations are based on a number of factors, including the length and nature of the customer's relationship with Fidelity, the customer’s trading history, and the type and size of the customer's account. Allocations under the traditional model are also impacted by the limited number of shares Fidelity receives from the lead underwriter; therefore customers who confirm their indication of interest may be subject to reduced quantities at the offering price or no shares at all depending on the demand for the offering.
- Confirmation of interest: In the traditional model, customers must confirm their indication of interest after effectiveness for all offerings. In the OpenIPO model, customers are not required to confirm their bid, unless a material event on the offering takes place such as the deal pricing out of the expected price range. If confirmation of a bid on the OpenIPO process is necessary you will be notified via the device you registered with Fidelity Alerts.
Why and how does a company go public?
A company goes public to raise capital for financing business plans, capital expenditures, and growth opportunities. When a company intends to go public:
- The company picks a lead underwriter to help with the securities registration process and the distribution of the shares.
The company must develop a preliminary prospectus that includes information on the management team, the company’s target market, competitors, all financial data for the company, and the expected price range and number of shares to be issued.
- The lead underwriter files a registration statement on behalf of the issuing company with the Securities and Exchange Commission (SEC). The company must typically wait a minimum of 20 days for the SEC to review the registration statement.
- The SEC reviews the statement and preliminary prospectus to determine if the issuer meets legal and regulatory requirements. However, the SEC neither approves nor disapproves the issue itself, it only clears the issue for sale.
During the SEC review process, the lead underwriter assembles a group of other investment banks and broker dealers to become members of the underwriting syndicate.
After the registration statement is filed and preliminary prospectuses are distributed, the underwriting syndicate and selling group members act as a distribution channel by recording indications of interest in the IPO on the part of institutional and individual investors.
- After the SEC declares the registration statement effective and the offering price has been determined, the selling group members are able to accept the confirmed indications of interest and begin the share allocation process.
- The company picks a lead underwriter to help with the securities registration process and the distribution of the shares.
What is a variable interest entity?
A variable interest entity (VIE) is a company in which control is established and enforced through a series of contractual arrangements, rather than through equity ownership. In some countries with restrictions on foreign direct investment, companies may use VIEs as investment vehicles to offer shares to foreigners. However, because ownership of a variable interest entity does not represent true ownership of the company’s assets, investing in VIEs carries additional risks. These include:
- Lack of true asset ownership. VIEs do not represent ownership in the company as stock does. In the event of a bankruptcy, owners of a VIE may not be entitled to the assets of the underlying firm.
- Corporate governance. Because shares in a variable interest entity do not generally entail true voting rights, owners of VIE vehicles may have limited influence over issues of corporate governance.
- Legal and regulatory. Historically, VIE structures have not been well-tested in court. In the future, there is the risk that foreign courts, regulators, or governments may invalidate them.
When will the offering be priced for sale?
Once the registration is declared effective and the offering price has been set, confirmations of indications of interest can begin.
How is the offering price determined?
The price is normally based on such factors as the company’s financials, products and services, income stream, as well as the demand for the shares and current market conditions.
The underwriter must determine a fair offering price which takes into consideration the need for the company to raise capital while offering the new issue at a price which represents a fair value of the shares.
The offering price and/or number of shares issued could be raised or lowered from what is described in the preliminary prospectus. Additionally, the offering can be delayed or postponed based on unfavorable market conditions.
When do the shares begin trading?
Typically, the day following pricing is the first day that the new security will trade on the secondary market (i.e., NYSE, Nasdaq or AMEX).
How does Fidelity allocate shares?
Fidelity’s allocation methodology and IPO system were designed to evaluate customers based on their relationship with Fidelity as defined by their Social Security number (SSN) or taxpayer identification number (TIN). Each customer who participates in an IPO offering is evaluated and ranked based on the assets and revenue they have in accounts under their SSN. Assets include all retail assets under the individual’s SSN/TIN and exclude assets or trades maintained on behalf of any divisions of Fidelity Investments Institutional Services Company, such as 401(k) or 403(b) plan assets. Revenue is comprised of the brokerage commissions, margin interest and mutual fund revenue generated in retail accounts of the individual’s SSN. The allocation methodology is done as fairly and equitably as possible. The size of a customer’s indication of interest is not considered during allocation other than the fact that we will not allocate more than the customer requested. Therefore, you should only enter an indication of interest for the amount of shares you are interested in purchasing, as entering a larger number will not help you receive additional shares and there is always the possibility that you could be allocated everything you ask for.
Who is W.R. Hambrecht & Co.?
W.R. Hambrecht & Co. (WRH & Co.) is an investment banking firm formed in February 1998. In addition to operating OpenIPO, the firm is engaged in the business of public and private equity investing, financial advisory services, research, and market making. WRH & Co.’s founder, William R. Hambrecht, has 40 years of experience in the securities industry and was also the founder, chairman, and CEO of Hambrecht & Quist.
Note: The venture capital affiliates of Fidelity Investments hold an equity investment of less than 5% in W.R. Hambrecht.
How does the OpenIPO auction work?
The OpenIPO auction is based on a model similar to that used to auction U.S. Treasury bills, notes, and bonds. Bids are entered with a limit price, representing the maximum price each investor is willing to pay per share.
Shortly after the SEC declares the issuer’s registration statement effective, the auction will close and the underwriter will establish the clearing price. The clearing price is established by tallying all the bids received, ranking them from highest price to lowest price, and beginning with the highest price, identifying the price level at which all of the shares can be sold.
Once the clearing price is determined, the underwriter and issuer will establish the public offering price, i.e., the price per share customers will pay for securities. In any particular offering under the auction process, the clearing price and the public offering price may be different. Based on negotiations between the underwriter and the issuer, the public offering price may be lower, but will not be higher, than the clearing price. Keep in mind that the allocation of shares will be determined by the public offering price, not the clearing price.
Once the offering price is set, the customer’s bids can be accepted. The allocation of shares through the OpenIPO process will be determined by the limit price submitted with the customer’s bid. All customers who submitted bids at or above the public offering price will be allocated either a prorated number of shares rounded to the nearest 100 or all of indicated shares. If the customer’s limit price is below the offering price of the issue, the customer will not be allocated shares.
In certain circumstances, you may be required to confirm your bid. If this occurs, we will send an email to the email account you registered when you signed up for Fidelity Alerts. If you fail to confirm your bid when requested, your bid will no longer be valid and you will not receive an allocation of shares. Please note that submitting a bid does not guarantee that you will be allocated any shares in the offering.
Note: Unless we notify you to the contrary, a confirmation of your bid is not required, and if you do not withdraw or revoke your bid, your bid may be accepted in whole, in part, or not at all by the underwriters soon after the offering is declared effective.
For more information, please see the Plan of Distribution section of the applicable prospectus.
How do I know what price to bid? Can I bid above the filing range?
The anticipated price range that is contained in the preliminary prospectus is the price at which the issuer expects to sell its stock. This price range is determined by the issuer and underwriter. This price range is an estimate and is only a guide.
You should avoid bidding a higher price than you wish to pay or bidding for more shares than you wish to purchase in the belief that the offering price and/or your pro rata allocation will be at a price you are willing to pay and/or in an amount you are willing to purchase.
In the event that the expected price range is changed prior to effectiveness, you will be notified of the new range. Under these circumstances, the issuer and underwriter will amend the registration statement and provide investors a prospectus which will reflect, among other things, the new expected price range. If the deal is priced outside of the expected range by a material amount (material amount percentage is defined in the plan of distribution section of the preliminary prospectus), you will be required to confirm your bid in order to remain eligible to purchase shares in the offering. At the time of confirmation, and anytime up until the close of the auction you will have the opportunity to change or cancel your limit price or reduce the amount of shares of your bid.
Once the clearing price has been determined, the offering price will be set and all customers who have entered a bid with a limit price at or above the offering price will receive a prorated allocation rounded to the nearest 100 at the offering price regardless of what their limit price was.
Note: If it appears that a bid is intended to manipulate the offering or may interfere with its completion, W.R. Hambrecht reserves the right to reject it. This includes extraordinarily high or unrealistic bids.
Customers should also keep in mind that they should bid for the amount of shares at a price they are willing to purchase the issue as there is the possibility that they receive a full allocation at that price and they would need to pay for these shares in full by settlement.
Can I enter multiple bids on a specific IPO?
Customers may enter only one bid per account per IPO, per offering.
Can I change the quantity or limit price of my bid?
You may modify, change, or cancel your bid up until the auction closes. The auction will close as soon as one hour after the registration statement of the offering is declared effective. After the auction closes, you may not change your limit price or quantity of shares requested.
How is an OpenIPO priced?
After the auction closes, the underwriter will establish the clearing price. The clearing price is calculated by tallying all the confirmed indications received, ranking them from highest price to lowest price, and beginning with the highest price, identifying the highest price level at which all of the registered shares would be sold.
Once the clearing price is determined, the underwriter and the issuer will establish the public offering price after taking a number of economic and business factors into account in addition to the clearing price. Please note that, in any particular offering under the OpenIPO auction process, the clearing price and the public offering price may be different.*
*Based on negotiations between the underwriter and the issuer, the public offering price may be lower, but will not be higher, than the clearing price. Keep in mind that the allocation of shares is always determined by the offering price.
Note: If it is determined (after effectiveness) that an offering is going to price outside the expected price range by a material amount (material amount percentage is defined in the Plan of Distribution section of the preliminary prospectus), a notification will be sent to customers with the new pricing information. Upon receiving the notification, all eligible customers must reconfirm their indications of interest to remain eligible to participate in the offering. Customers may cancel their bid or reduce the amount of shares requested up until the close of the auction.
How does Fidelity allocate shares for an OpenIPO?
Once the offering price is set, customer bids can be accepted. The allocation of shares through the OpenIPO process will be determined by the limit price submitted with the customer’s bid. All customers who submitted bids at or above the public offering price will be allocated either a prorated number of shares rounded to the nearest 100 or all of the indicated shares. If the customer’s limit price is below the offering price of the issue, the customer will not be allocated shares.
Note: The underwriter reserves the right at its discretion to modify the allocation methodology at any time. For further information regarding the allocation methodology, please read the Plan of Distribution in the preliminary prospectus.
How is proration determined?
The pro rata percentage will be determined by dividing the number of shares available for sale by the number of shares bid for at the offering price and above. For example: if 4 million shares are being offered by the issuer and there are 5 million shares of demand at and above the offering price, then all bidders will receive 80% of the shares for which they bid rounded to the nearest 100.
Note: The underwriter reserves the right at its discretion to modify the allocation methodology at any time. For further information regarding the allocation methodology, please read the plan of distribution in the preliminary prospectus.
How to participate
How do I participate in an IPO?
If you’re interested in participating in a new issue equity:
- Ensure that you meet Fidelity’s eligibility requirements for participating in an IPO.
- Answer a series of questions to determine if you are a qualified investor per FINRA (Financial Industry Regulatory Authority). FINRA rules prohibit “restricted persons” (certain persons associated with the financial services industry) from participating in the purchase of new issue offerings. Customers must provide responses to a series of questions annually to determine if they are “restricted persons” under the interpretation.
- Sign up for Fidelity Alerts. Check your Fidelity Alerts device regularly for deal updates, because they can contain important information about price changes and other changes to the offering. All change notifications to the offering will be communicated via the device the customer registered with Fidelity Alerts.
- Review the preliminary prospectus of the offering. This document contains offering and issuer information that the underwriter and issuer have decided you should have in order to make an informed investment decision.
- Enter an indication of interest or a bid, depending on the type of IPO sale.
Traditional IPO: The indication of interest provides Fidelity with the maximum number of shares a customer is interested in purchasing. Call Fidelity to confirm your indication of interest on the confirmation date, which is after effectiveness and pricing date (the actual date will be disclosed to customers when they place their indication of interest).
OpenIPO auction: The bid should contain the maximum price and number of shares that you are interested in purchasing of the offering. The limit price you enter with your bid will be submitted to the underwriter along with other bids by customers interested in participating in the offering.
A price range is provided in the prospectus for each offering based on an estimate by the underwriter. However, you can enter a limit price for whatever price you believe that the shares are worth. In submitting a bid, it must contain a minimum of 100 shares and cannot exceed 1,000 shares per account, per offering. Bids may be rejected by the underwriter in order to maintain a bona fide distribution to public shareholders. The securities may not be sold nor may bids be accepted prior to the time that the registration statement is declared effective.
- Receive notice of expected date of effectiveness via Fidelity Alerts.
Traditional IPO: The morning of the expected date of pricing, you will receive a notification that the offering may go effective shortly.
OpenIPO auction: Two days prior to the expected date of effectiveness, you will receive a notification indicating the proposed date that the registration statement will be declared effective. The notification also informs you that auction will close shortly after effectiveness. You are informed that you should review your bid, as once the auction is closed you will not be able to adjust or cancel your bid. The auction can close as soon as one hour after the notice of effectiveness is sent.
- Receive notice of effectiveness and pricing via Fidelity Alerts.
Traditional IPO: You will receive a notification that: 1) the offering has been declared effective and has been priced; 2) in order to have an opportunity to purchase shares, you must confirm your indication of interest by a stated time; and 3) if you do not want to purchase shares, you must withdraw any confirmed indication prior to allocation, which will not occur prior to a stated time.
OpenIPO auction: It is anticipated that the SEC will declare the issuer’s registration statement effective in the afternoon on the day of pricing, usually after 1:00 p.m. ET. After the registration statement for the offering is declared to be effective, you will receive a notification that: 1) the offering has been declared effective; and 2) if you do not want to purchase shares, you must withdraw any bid prior to auction close, which may occur as soon as one hour after the deal is declared effective.
- Confirm your indication of interest to place your order to buy shares. This always happens during a traditional IPO, but it is only sometimes required for an OpenIPO.
Traditional IPO: Indications of interest may not be confirmed prior to the registration statement being declared effective and the shares are priced. By confirming your indication of interest, you are placing an order to buy.
OpenIPO auction: In certain circumstances, you may be required to confirm your bid. If this occurs, we will send a notification via Fidelity Alerts. If you fail to confirm your bid when requested, your bid will no longer be valid and you will not receive an allocation of shares. Please note that submitting a bid does not guarantee that you will be allocated any shares in the offering. Unless we notify you to the contrary, a confirmation of your bid is not required, and if you do not withdraw or revoke your bid, your bid may be accepted in whole, in part, or not at all by the underwriters soon after the offering is declared effective.
- Receive notification of allocation. Customers will receive a notification that the offering has been priced and allocations have been placed in customer accounts. Customers are instructed to check their accounts on Fidelity.com to verify if they received an allocation. This notification will be sent via Fidelity Alerts.
- Receive the final prospectus. Customers who are allocated shares of the offering will receive a copy of a written confirmation accompanied by the issuer’s final prospectus. The final prospectus contains the same type of information included in a preliminary prospectus and certain amendments including, but not limited to: the exact number of shares offered, the net proceeds going to the issuer, and the concession being given to the underwriter.
Why do I need to confirm my indication of interest?
With new issue offerings through Fidelity Investments, customers must confirm their indication of interest after effectiveness and pricing. By confirming your indication of interest you are informing Fidelity that you are interested in placing an order to buy shares at the offering price. Customers who confirm their indication of interest are not guaranteed an allocation of shares. Customers who do not confirm their indications of interest are not eligible to receive an allocation of shares.
Can I change or cancel my indication of interest?
You may increase your indication of interest up through the close of the indication of interest period. You may decrease or cancel an indication of interest until share allocation takes place. Once share allocation takes place, your indication may not be canceled or modified.
Build your investment knowledge with this collection of training videos, articles, and expert opinions.