For most of history, initial public offerings have been a walled garden for many investors, who were unable to gain access to their benefits. That may start to change if Robinhood and SoFi Technologies get their way. Telis Demos reports for The Wall Street Journal:
Small investors seem more influential than ever these days. So as the initial public offering market heats up, efforts to get those investors a bigger seat at the table is a hot idea. It’s also not a new one.
Upstart brokerages Robinhood Markets and SoFi Technologies recently said they would give their customers access to IPOs. They are among the latest firms to try to crack open one of Wall Street’s oldest clubs: those getting distribution of IPOs at the offering price, before shares begin trading.
That early access gives investors a shot at the vaunted IPO “pop.” Since 1980, standard U.S. exchange-listed IPOs have on average risen about 18% from their pre-trading offering price to the close of first-day trading, according to University of Florida finance professor Jay Ritter’s data. And some deals do much more than that, occasionally even doubling in first-day trading.
But the Wall Street investment banks that lead IPOs, as well as the listing companies themselves, have typically distributed the bulk of shares in the offerings to institutions. The portion that does go to so-called “retail” investors may go to large wealth-management customers, rather than small self-directed online accounts.
Now, as IPO pops get even bigger in this market—more than 40% on average last year, the best since 2000, according to Mr. Ritter—and as small investors begin to wield their increasing influence over the market, perhaps it seems natural that they might want a bigger slice of the pie.
During the first dot-com boom, some discount brokers sought to get into investment banking to increase their access to stock offerings, but those efforts mostly subsided after the bubble burst in the early 2000s. A couple more recent startups aiming to deliver big slices of hot IPOs to small investors also fizzled.
Established online brokers such as Charles Schwab offer some IPO access, typically via partnerships with investment banks. ClickIPO works with several online brokers to pool small investors and then helps underwriters and companies distribute shares to them. Occasionally, companies also set aside IPO shares for customers or users, as for example Airbnb did for hosts.
The boom-and-bust cycle of the IPO market itself has played a role in this halting progress. But there is also a more fundamental issue: scarcity. For any given hot IPO, demand typically far exceeds supply.
So bankers and companies get to be choosy. Many on Wall Street would argue that this process is best for capital formation, helping companies build sustainable bases of fundamental investors that will encourage long-term thinking. The prospect of a “pop” serves as an incentive for those investors to buy the initial offering.
SoFi and Robinhood aim to discourage IPO buyers from flipping their newly acquired shares by restricting those who sell within 30 days from participating in any more IPOs for two months or longer. This could boost the appeal of their clients to companies or underwriters.
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