Penalty Bid

To discourage individual investors from quickly selling IPOs, some brokerage firms impose a penalty bid on the individual broker if his client sells an IPO within a certain period of time. Thus, a broker who would incur a financial penalty if a client wants to quickly sell an IPO has a built-in conflict of interest. The SEC requires brokerage firms to disclose penalty bids.


Also known as a pink herring, this is a form of a preliminary prospectus that contains no proposed price range or number of shares (unlike a red herring). Emerging growth companies are allowed to distribute pinks during testing-the-waters discussions. The first public IPO filing on EDGAR, the S-1 or F-1, is typically a pink. The offering price and number of shares is eventually set and published in the final prospectus.


Once a company files its registration statement (or S-1) with the SEC, it becomes part of the pipeline of IPOs expected to be priced over the next few months. In addition to the public IPO pipeline, the confidential filing process has created a shadow pipeline. Confidential filers privately get feedback from the SEC before entering the public IPO pipeline with an S-1. Then, as soon as 15 days later, they set a proposed price range and share count in a red herring and begin the roadshow. Roughly 1-2 weeks later, after the deal has priced, it is removed from the pipeline. IPOs can also leave the pipeline by filing a withdrawal (form RW) or by being acquired.


This is what happens when an IPO fails to attract sufficient buyers. Sometimes the lead manager will lower the price to entice buyers, or state that the deal is attempting to price on a day-to-day basis. If that doesn’t work, the deal is postponed. It usually takes at least six months for an IPO to hit the comeback trail, though many times an IPO will choose to withdraw the IPO entirely.

Preliminary Prospectus

This is the offering document printed by the company containing a description of the business, discussion of strategy, run-down of key risks, presentation of historical financial statements, explanation of recent financial results, management and their backgrounds and ownership. The preliminary prospectus will typically first be filed without a proposed price range or share offering (pink herring) and then later have that information filled in (red herring). It is the company’s principal marketing document. Management, when touring on the roadshow, is limited to discussing only the information contained in the prospectus. After pricing, the company will file a final prospectus.


In a perfect world, IPOs are designed to be priced at a discount to existing publicly traded companies. In theory, this is meant to reward early investors for buying an unseasoned company with no public track record. In reality, it is the lead manager's educated estimate on the highest price at which there will be solid demand for the IPO, both on the offering and in the aftermarket. The difference between the IPO price and its opening price is called the premium. Some investors think the difference between the IPO price and the price at the first day's close is a better measurement of the IPO premium due to the confusion that normally surrounds balancing buy and sell orders at the opening.

Price Action

Refers to the character of recent trading activity in a particular stock, usually within the context price volatility and trend strength over a short span of time.

Price Talk

The rumored offering price. Price talk above the range indicates that it could be a hot deal, while price talk below the range indicates a lack of demand.

Private Equity

Equity capital not quoted on public exchanges. Consists of investors and funds that make investments directly in private companies or that conduct buyouts of public companies that result in a delisting of public equity. Large private equity include Blackstone, Apollo, KKR, Carlyle and Oaktree Capital.

Private Placement

The sale of securities to a relatively small number of select investors as a way of raising capital. This can be concurrent with a company's IPO and is seen as a net positive, especially if the shares are placed at the IPO price.

Public Venture Capital

A derogatory term used to describe a company is an early stage of development – that is, lacking revenues, operating profits and perhaps even products – that ordinarily would be financed with private capital trying to access the public markets by doing an IPO.