We are always looking for ways to grow our money through legitimate investment opportunities – and in The Bahamas, major opportunities for the average Bahamian investor are far and few between. With increased activity in the local capital markets, opportunities for investors are increasing, and as such, you should try to be as informed as possible. To understand more about the capital markets, check out our article Understanding the Securities and Capital Markets – An Introduction. In this article, we will focus on initial public offerings (IPOs) and the things you should understand to make an informed investment decision.
What is an IPO?
An IPO is most commonly understood as a process that private companies use to go public – which means that instead of private ownership, many investors (i.e. the public) have the chance to own a portion the company and, in many cases, are allowed to control the company to a certain extent. This is not always the case – an IPO can simply mean that a company is offering securities (that come in many forms) to the public for the first time. Usually, this is accomplished by issuing shares (also known as stocks), which represent partial ownership in the company; however, other types of securities (such as bonds) can be issued during an IPO that do not necessarily have the same characteristics of shares. For example, if bonds are being issued instead of shares, investors become creditors that the firm has to repay rather than partial owners. To learn about the basics of securities, check out our article Investing 101: Stocks vs. Bonds.
An IPO is usually conducted as a way for companies to raise a large amount of money with the aim to expand business operations. During an IPO, potential investors are able to purchase securities with the hope that they will increase in value.
What must companies do before conducting an IPO?
Conducting an IPO is a regulated activity and in order for companies to go public, they must engage a registered firm (a firm registered with the relevant regulator) to act as an IPO underwriter. An IPO underwriter is a financial specialist that works with the company wishing to conduct an IPO and performs duties such as:
- Determining the price of the shares;
- Liaising with the regulator; and
- Selling the shares to willing investors1Definition adapted from: https://www.investopedia.com/terms/u/underwriter.asp.
An IPO underwriter must also conduct due diligence on the company prior to agreeing to act as the company’s representative. In this instance, due diligence on the company refers to researching the company, its owners, subsidiaries, business activities, risk factors, and its finances to ensure that the deal would be lawful and void of misrepresentations.
Prior to an IPO, the relevant regulator (in The Bahamas’ case – the Securities Commission of The Bahamas) reviews all necessary documents and either approves or rejects the IPO. It is important to note that if the regulator gives approval, it does not necessarily mean that the regulator endorses the company wishing to go public nor is it an indication of the viability of the company going public.
What should potential investors expect and consider?
It was previously mentioned that IPO underwriters must conduct due diligence on the company; it is also worth mentioning that due diligence must be conducted on potential investors and this is to ensure that all investors are who they say they are (for compliance purposes). To ensure this, you, as an investor, may be asked to provide identification documents, which may include:
- Passport;
- Driver’s license;
- National insurance card;
- Proof of address (either a voter’s card or a utility bill); and
- Contact information.
If the opportunity arises and you are interested in investing in a company during an IPO, here are some things to consider to ensure you make an informed decision:
- READ, READ, and READ!!!
Read ALL materials available to you prior to making the decision – there should be enough time for you to do this. Materials to consider include a prospectus (sometimes referred to as an offering memorandum), which is THE document that outlines the nature of the IPO. This document is the primary document at your disposal and has to be approved by the regulator before it is issued to the public. The prospectus includes information such as:
- The type and price of the securities being offered;
- Background of the company;
- Intent of the IPO;
- Nature of the project they intend to fund;
- Potential return on investment, which gives an estimate of the potential profitability of the company;
- Key personnel of the company; and
- Risk factors, etc.
It is also important to read any other materials made available, which may include:
- Subscription instructions;
- Frequently asked questions;
- Speech transcripts; and/or
- Presentation slides.
The materials should be able to answer key questions that you should take into consideration, including:
- Is there a minimum amount that I need to invest, and if so, what is it?
- Is there a maximum amount that I can invest, and if so, what is it?
- Are there any non-monetary privileges that I can expect as an investor, e.g. can I vote on decisions of the company?
- Is there a holding period that entails me keeping these securities for a minimum amount of time before selling them to another investor?
- Whom should I contact if I have questions?
- What is the estimated return on investment?
- Can my application to invest be rejected, and if so, what are the factors that can cause a rejection?
- When does the IPO end/close?
- When can I begin to see returns on my investment?
If there is something that you do not understand, contact the IPO underwriter’s representatives for clarification before the close of the IPO.
- Consider your willingness and ability to take on risk
Investment risk is a two-way street – you can experience gains or losses. Be sure to consider the amount of risk you are willing and ready to take on, as well as your ability to take on the risk based on your financial situation and future goals. Be sure to pay attention to risk factors outlined in the prospectus. Some things to keep in mind when trying to decipher the amount of risk you can handle include:
- Your current financial situation (if there is a minimum investment amount, can I afford it?);
- Your future financial goals (do these securities align with what I want?);
- The potential gains and losses (can I afford to take a loss if the investment does not work out?); and
- Timeline needed to realize your financial goals (how long would I need to wait before I see a return?).
Examples of Bahamian IPOs
Some of the companies that have had successful IPOs in The Bahamas include Cable Bahamas, Commonwealth Bank, Arawak Port Development, Commonwealth Brewery, and Colina Holdings Limited. The last IPO was conducted approximately 10 years ago, which is not great for younger investors, but opportunely, there is an ongoing IPO for the Nassau Cruise Port being conducted through the Bahamas Investment Fund (BIF) and you can learn more on the BIF’s website.
final thoughts
The choice to invest during any IPO is a personal decision and should be made after conducting research. Ensure that you make an informed decision by reading all materials available and asking questions, if necessary. A lot of excitement happens around new investment opportunities, but remember to carefully evaluate the opportunity prior to investing because just as you can earn returns, you can also incur losses. In the near future, Cays to Coins will produce an article that presents information on the events after an IPO closes, so stay tuned.
Note: This article is not intended to break down the nature of the ongoing IPO and this article is not to be misconstrued as official investment advice; however, the information provided in this article should give you a good understanding of IPOs and the things you should consider prior to making an investment decision.
