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Initial Offerring

In: Business and Management

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Initial Public Offering
All firms must have a source of funds to acquire assets and retire outstanding debt. One possible source for these funds includes savers who are not currently using all of their income to buy goods and services. The transfer of these funds may occur indirectly through a financial intermediary or directly through the purchase of securities issued by firms. The investment bankers act as a middleman between the firm and investors who underwrites the securities and guarantee the issuing firm a specified amount of money. The SEC also enforces the federal securities laws that govern the trading of corporate stocks and bonds in the secondary markets. The intent of SIPC is to increase public confidence in the securities industry by reducing the risk of loss from a failure by a brokerage firm.
Investment Banker and Underwriter
The initial public offering (IPO), involves many pieces coming together to offer an organization’s shares to public. When high-level issues of financial organization come into play, investment bankers are hired to provide advice (The Princeton Review, 2014). Once investors make the IPO the investment banker acts as a middle man. Their role is to sell the stock to the public while bringing the investors and the firm offering the shares together. “The firm in need of funds approaches the investment bankers to discuss an underwriting (Mayo, 2012, p. 37." Based on the investment banker’s guarantee to sell, an underwriter purchases the securities. This agreement to purchase these securities obligates the underwriter to bear the risks associated with making the promised sales (Mayo, 2012). If the investment banker does not sell the securities, the underwriter is held financially responsible.

Originating House and Syndicate
With each investment banker comes a brokerage firm. “An underwriting starts with a particular brokerage firm, which manages the underwriting, that firm is called the originating house (Mayo, 2012, p. 38." When the underwriting involves multiple brokerage firms, they come together to form a syndicate. A syndicate relieves the originating house from selling all of the securities. Instead, the syndicate comes together to portion out a specific number of securities to each firm. Syndicates come with the additional advantage of reaching more buyers that increase the likelihood that all of the issued securities sell (Mayo, 2012).
Pricing a New Issue
Most sales of new securities are underwriting, the pricing of securities is crucial. If the initial offer price is too high; the syndicate will be unable to sell the securities leaving the investment bankers to have only two choices. (1)Maintain the offer price and to hold the securities in inventory until they sale. (2)Allow the market find a lower price level that will induce investors to purchase the securities. The underwriters purchase the securities and hold them in inventory, and they either must tie up their funds, which could be earning a return elsewhere or must borrow funds to pay for the securities. The underwriters may choose to let the price of the securities fall, and the inventory of unsold securities can then sell at a lower price. They also cause the customers who bought the securities at the initial offer price to lose. The underwriters certainly do not want to inflict losses on the customer, so the investment bankers try not to overprice a new issue of securities (Mayo, 2012 pg. 39)
Risks in the Public Offering Crossing state borders is not unusual for securities, so the primary regulation is at the federal level. These laws have been developed to protect the investor but in no way guarantee the investor will make money. They were first developed in the 1930’s as a result of the chaos in the market crash of 1929. “The 1933 act covers new issues of securities, and the 1934 act is devoted to trading in existing securities,” (Mayo, 2012 pg. 43). Since the acts would require administrative oversight, the Securities and Exchange Commission (SEC) was established.
Full-disclosure laws indicate that a firm that is publicly traded must keep the public informed on facts regarding the firm. In addition to filing reports during the year regarding material changes to the firm, the firm must file an annual report (the 10-K report) with the SEC. This information in the annual report to investors and is supplied free of charge. If the firm does not disclose such information that may affect their trading capacity, the SEC may suspend trading of their stock.
Foreign exchange risks the company can face and ways to mitigate them.
The main risks that may occur with foreign exchange risks the company can face include currency's exchange rate and political risk. Foreign exchange risk occurs when a domestic currency appreciates against a foreign currency. Due to the somewhat volatile nature of the exchange rate, it can be quite difficult to protect against this kind of risk, which can harm sales and revenues. A business may attempt to hedge some of its foreign exchange risk by buying futures, forwards or options on the currency market.
Political risk transpires when a country's government unexpectedly changes its policies, which now negatively affect the foreign company. Some governments will request additional funds or tariffs in exchange for the right to export items into their country. Acts of war, terrorism, and military coups and a new president are all extreme examples of political risk. The best way to avoid the barriers is to do research, and acquire political risk insurance in order to protect equity, investments, and loans from specific government actions.
Investment banker serves as a middleman between prospective investors and companies that intend to raise capital through the issuance of new stock. The underwriters are responsible for pricing, selling and organizing. Originating house and Syndicate are investment bankers joined together to manage the underwriting and sale of a new issue of stock to the general public. A firm may not sell public offering shares to an individual investor unless it has determined the investment is suitable for that particular investor. When an organization decides to engage in international financing activities, they risk the value of an investment fluctuates due to changes in a currency's exchange rate.

References
Foreign Currency Transaction Risk, retrieved November 19, 2014 from http://www.sjsu.edu/faculty/watkins/tran.htm
«Managing Foreign Exchange Risk» retrieved November 19, 2014 from http://www.edc.ca/EN/Knowledge-Centre/Economic-Analysis-and-Research/Documents/managing-foreign-exchange-risk-guide.pdf
Mayo, H. B. (2012). Basic finance: An introduction to financial institutions, investments, and management (10th ed.). Mason, OH: South-Western.
The Princeton Review. (2014). Career: Investment banker. Retrieved from http://www.princetonreview.com/careers.aspx?cid=84

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