Are investment banks really trustworthy?
I get it, you probably answered the topic question before clicking to read. But the fact is, your answer depends largely on your experience in the investment space. Investment banks are quite popular, the basic thing about them apprehend the mind more. The name gives it away; to an extent. Investment banks conduct high-level financial operations between a company conducting their Initial Public Offering (IPO) or subsequent funding series and the investors placing their bets on the profitability of the company post-IPO.
Depending on the company’s profile and the financial authority it commands, IPOs involve several millions to billions of dollars moving from investors to project founders. Investment banks play a very important role in collating these funds from investors, accounting for them, and moving them to the concerned company’s account. They are inevitable in average and high-profile fundraising. Small projects conducting IPOs can develop an alternative. Popular banks with a section delegated to IPO fund management include Bank of America, JP Morgan, and Deutsche bank. This department tasked with managing funds raised in IPOs are known as investment banks.
So, you’re preparing to make your company public through an IPO and get your shares listed on the stock market? With huge amounts expected to roll in from dispersed investors, an investment bank is a simple solution. Investment banks provide an array of services to companies preparing for fundraising events, this includes advisory roles, investor relations, and analysis.
When investment banks are not running valuable errands for companies going public, they also serve pensioners, hedge funds, and government institutions. When it’s the big money involved, investment banks are specialized in bulky and recurring transactions.
In addition to undertaking complex financial roles for startups during IPOs, investment banks introduce new companies to a larger community of investors and can assist young companies in expanding their investor base.
While the services of investment banks are essential for startups and established firms, this hasn’t always been shades of good. Independent investor relations officers will constantly remind new companies to limit the information shared with investment banks. A sweet and rocky story exists between stock market-listed and soon-to-be-listed companies and investment banks.
“The Chinese wall” was introduced to address this conflict. Like the historic structure, the Chinese wall was introduced to create an efficient barrier between the trading division of investment banks and stock market-listed companies. This barrier is a set of rules that limits the information shared between companies and investment banks, especially where it concerns events that could influence stock price movements.
Equipped with firsthand information, the trading division of investment banks makes profitable trade transactions for their own gains and sometimes to the detriment of concerned companies, rival firms, or other individual and institutional investors. The Chinese wall was introduced in the financial industry after the enactment of the Gramm-Leach-Bliley Act of 1999 (GLBA). According to rules laid down by this regulation, investment banks are limited in the services they provide for companies. This separates the trading arm of the financial service firms from their insurance and banking arms.
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