The Pot
The pot — as in, "what's left in the pot" — is the portion of a stock or bond issue that investment bankers return to the managing or lead underwriter after an issue such as an initial public offering (IPO). The underwriter then sells the portion to institutional investors. The pot is the portion of a stock or bond issue that investment bankers return to the lead underwriter to be protected and then sold to institutional investors. In the case of an IPO, the lead underwriter will typically assemble and collaborate with other investment banks to establish an underwriting syndicate or group of investment banks. As stated above, the pot is the portion of the issue that investment banks return to the lead underwriter following the deal. Institutions can designate the sales credits attached to portions of their total order to any underwriter or selected dealer and can thus be lucrative to be the underwriter of a successful IPO.
What Is the Pot?
The pot — as in, "what's left in the pot" — is the portion of a stock or bond issue that investment bankers return to the managing or lead underwriter after an issue such as an initial public offering (IPO). The underwriter then sells the portion to institutional investors.
Understanding Pot and Its Role in Initial Public Offerings (IPOs)
An institutional investor is a non-bank person or organization who trades securities in large enough share quantities or has a net worth high enough to qualify for preferential treatment and lower commissions. Examples of institutional investors include hedge funds, high-net-worth individuals, pension funds, and endowments. These players have the financial capital to buy large amounts of stock after an issue such as an IPO. Underwriters follow specific steps when undertaking an IPO.
Steps of an Initial Public Offering (IPO)
First, an external IPO team is comprised of an underwriter, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts. Next, information regarding the company is amassed, including financial performance and expected future operations.
These records become part of the company prospectus, which is circulated for review among potential investors. Financial statements are submitted for an official audit. The issuing company finally files its prospectus with the SEC and sets a date for the offering.
Institutions can designate the sales credits attached to portions of their total order to any underwriter or selected dealer and can thus be lucrative to be the underwriter of a successful IPO.
As potential institutional investors look through the company prospectus, book building occurs. Book building is the process by which an underwriter attempts to determine at what price to offer new shares, based on demand. An underwriter may build their book by accepting orders from fund managers, who will indicate the number of shares they would like to purchase and the price they will pay.
Once investment bankers or IPO underwriters determine the price, the company markets the IPO before its first day of trading. As stated above, the pot is the portion of the issue that investment banks return to the lead underwriter following the deal.
Typically, the lead manager of an IPO obtains the greatest share of the pot.
Pot and the Lead Underwriter
In the case of an IPO, the lead underwriter will typically assemble and collaborate with other investment banks to establish an underwriting syndicate or group of investment banks. The lead underwriter will take charge of assessing company financials and current market conditions to arrive at the initial value and quantity of shares to be sold. Being the lead underwriter can be highly lucrative — if a deal is successful.
Related terms:
Book Building
Book building is the process by which an underwriter attempts to determine the price at which an initial public offering (IPO) will be offered. read more
Bought Deal
A bought deal is a securities offering in which an investment bank commits to buy the entire offering from the client company. read more
Checking Account
A checking account is a deposit account held at a financial institution that allows deposits and withdrawals. Checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. read more
Financial Statements , Types, & Examples
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements include the balance sheet, income statement, and cash flow statement. read more
Friendly Hands
Friendly hands is a nickname for investors in an IPO who will likely hold onto the security for a long time. read more
Investment Securities
Investment securities are securities (tradable financial assets such as equities or fixed income instruments) that are purchased in order to be held for investment. read more
Initial Public Offering (IPO)
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. read more
Lead Underwriter
A lead underwriter is usually an investment bank that organizes an IPO or a secondary offering for companies that are already publicly traded. read more
Offering
An offering is the issue or sale of a security by a company. It is often used in reference to an initial public offering (IPO). read more
Offering Price
An offering price is the per-share value at which publicly issued securities are made available for purchase by the investment bank underwriting the issue. read more