Stock FAQs: IPOs

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.

Fidelity brokerage customers can be notified automatically of new issues available through Fidelity:

• Via email, ATP alert after signing up for Fidelity AlertsLog In Required
• Via the IPO calendar on Fidelity.com/ipo
• By automated phone by pressing 1 on 800-544-5631

Customers can review, download, or print a copy of the preliminary prospectus by selecting "download prospectus" from the offerings on the IPO research page.

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. Members of Premium Services are also eligible.

The $500,000 and $100,000 requirement will be determined weekly by aggregating all assets and trades in retail accounts which list the same name and Social Security number. Institutional assets, such as annuities, 401(k) or 403(b) plan assets are excluded from the eligibility requirements. 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 (which includes excess margin securities).

Regulations governing IPOs do not allow Fidelity to extend credit on new issue (IPO) securities and therefore these securities are not marginable for at least 30 days following pricing. IPO shares must be paid for using cash or cash available to borrow based upon the value of your other holdings.

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 equity security is typically the trade date plus two business days.

Fidelity eligibility rules require $2,000 in any brokerage account from submitting an indication of interest.

You can receive automated pricing notification via email or ATP alerts after signing up for IPO notifications on Fidelity AlertsLog In Required.

Customers can view the status of allocations to their individual brokerage accounts on Fidelity.com allocated on the morning following pricing, typically after 9:15 AM ET.

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

A company goes public to raise capital for financing business plans, capital expenditures, and growth opportunities. When a company intends to go public:

1. 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.
2. 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.
3. 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.
4. 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.

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.

The expected pricing date for the offering can be found on the new issue calendar at Fidelity.com/ipo. The lead underwriter sets the offering price on a new issue typically on the evening of the day when the Securities and Exchange Commission (SEC) declares the registration statement effective, which usually occurs around 7:00 PM ET.

Once the registration is declared effective and the offering price has been set, confirmations of indications of interest can begin.

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.

The newly issued IPO shares will generally trade on the secondary market (ie: NYSE or NASDAQ) on the day following pricing night. While there is no set time for the shares to begin trading, shares typically begin trading between 10:00 AM ET and 2:00 PM ET, but each security can vary. IPO shares will not begin trading at market open.

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.

If you're interested in participating in a new issue equity offering:

1. Ensure that you meet Fidelity's eligibility requirements for participating in an IPO.
2. Sign up for Fidelity IPO AlertsLog In Required. Fidelity IPO Alerts make you aware when new offerings are available and keep you apprised of deal updates for offerings in which you have submitted an indication of interest. All change notifications to the offering will be communicated via Fidelity Alerts.
3. Download and 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.
4. Answer the Rule 5130 / 5131 qualification questions. FINRA rules prohibit "restricted persons" (certain persons associated with the financial services industry) from participating in the purchase of new issue offerings. You must confirm that you are not a "restricted person" on each IPO in which you choose to participate.
5. Enter an indication of interest for the offering you are interested in participating. The indication of interest provides Fidelity with the maximum number of shares a customer is interested in purchasing. 
6. Confirm your indication of interest shares on Fidelity.com after the registration statement has been declared effective and the offering has priced, which is typically after 7:00 PM ET on the night of pricing. Indications of interest may not be confirmed prior to the registration statement being declared effective and the offering pricing established. By confirming your indication of interest, you are placing an order to buy shares at the offering price. If you do not confirm your indication of interest, you will not be eligible for an allocation of shares.
7. Allocation of shares will occur on the morning following pricing and is usually complete before 9:30 AM ET. An alert will be sent once allocations are complete, and you can check your account to determine whether you were allocated shares. If you receive an allocation of shares, you must have adequate funds available to settle the purchase in the settlement date which is typically the trade date plus two business days.

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.

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.

To verify that your indication of interest has been entered, click on Participate, then choose your account and select "view open indications of interest". You will also have the opportunity to modify or delete your indication of interest.