Roadshow: CNBC Explains

If a company that's privately owned wants to go public and offer investors the chance to buy securities in the firm, one of the first things they do is something called a 'Roadshow.' CNBC Explains.

What is a road show?

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Simply put, roadshows—which are also called 'dog and pony shows'—are a marketing tool to attract investors.

As such, they are one of the most important steps by a company planning to issue securities through an IPO. An IPO is the acronym for initial public offering, which is the first time a company's stock is issued to the public.

Here's how a roadshow works. The company doing the 'show' puts together a team of executives to give financial information, such as a business outlook for the firm, why it's doing an IPO, growth on investment, a possible sales price for the stock, and answer questions from analysts and investors.

The presentation is usually full of facts and figures, with slideshows and documents to back up the claims. The team will try to make the firm look as profitable and forward-looking as possible in order to drum up the most positive interest.

This can all be part of what's called a prospectus, which is a document that contains all the road show information the company has put together.

Roadshows can literally be that—the company's team travels across the globe to make the presentation. However, they can be done by phone or by a webcast, too. The shows vary in length from a single phone call, to up to two weeks if traveling is involved.

American as well as foreign firms planning IPOs usually do roadshows.

Why are roadshows important?

Roadshows are considered critical to the success of an IPO, as companies need to impress institutional investors so that at least a few of them are willing to invest.

Also, some large investors will not put money in a company without having the opportunity to meet with senior management. Roadshows often provide that opportunity.

Who attends roadshows?

The average investor is left out.Only institutional and big-money investors are invited to attend the presentations.

Are there rules governing roadshows?

Yes. A roadshow can only take place after a firm has registered astatement of planning to offer securities with the Securities Exchange Commission, or SEC.

However, there are exceptions in which some firms can conduct a roadshow before the filing. These road shows would be conducted by the investment banks, like Goldman Sachs, that are funding the company's IPO. They would be allowed to do the roadshows, because the SEC would have determined they have a well-seasoned reputation for conducting past road shows and IPOs.

Also, roadshows must be factual, according to the SEC. The information provided must be as accurate as possible and there can be no misleading facts and figures presented to potential investors.

Any information deemed inaccurate or misleading could lead to fines and penalties imposed on the firm and/or the investment bank, by the SEC.