As you know (having been in ibanking), the IPO sales process of shares goes something like this:
1. The company and ibanks determine the offer price and offer the shares to institutional investor customers (ranging from mutual funds, money managers to other banks).
2. The banks then turn around and sell these acquired shares as "IPO shares" at the offer price pre-market-open to their clients. Basically, "financial advisors" at places like BoA, ML, JPM, etc move these shares onto their retail customer base.
3. The next day, the market opens and the shares start trading in the open market. Any "mom and pop" investor can buy the shares on market.
Now, the institutional investors in (1) have done their homework and think it's worth buying the shares, whether they intend to keep the shares or push them onto someone else soon. So they don't need to be "protected" (as long as the S1 is accurate).
What about the people in (2)? Well, the sophistication of these retail investors ranges from sophisticated to clueless. Actually, there's really no material differnece between (2) and (3), other than (2) having a bit more money on average than their (3) counterpars.
But what can you really do when all the necessary financial information of a company is presented in the S1? Retail investors have developed this strange notion that investing in common stock is this "easy" way to make money, when in fact it has always been an area where "you better know wtf you're doing". Do you prevent "clueless" people from buying shares at all? Do you similarly prevent "clueless" billionaires from buying Picasso paintings?
I mean you'd think that if the IPO price is too high, then the investors simply wouldn't buy. After all, if we consumers think a product is too expensive (whether it be a house, a car, or a phone), we'll exercise discretion and shy away from the purchase. The underlying issue (provided that the S1 information is reasonable and accurate -- which is one valid concern you raise) I think is the ignorance and unfounded optimism of the average retail investor towards IPO shares. TBH I don't see how this "retail investors getting wronged" phenomenon gets rectified unless these investors themselves become educated about basic investment principles.
1. The company and ibanks determine the offer price and offer the shares to institutional investor customers (ranging from mutual funds, money managers to other banks).
2. The banks then turn around and sell these acquired shares as "IPO shares" at the offer price pre-market-open to their clients. Basically, "financial advisors" at places like BoA, ML, JPM, etc move these shares onto their retail customer base.
3. The next day, the market opens and the shares start trading in the open market. Any "mom and pop" investor can buy the shares on market.
Now, the institutional investors in (1) have done their homework and think it's worth buying the shares, whether they intend to keep the shares or push them onto someone else soon. So they don't need to be "protected" (as long as the S1 is accurate).
What about the people in (2)? Well, the sophistication of these retail investors ranges from sophisticated to clueless. Actually, there's really no material differnece between (2) and (3), other than (2) having a bit more money on average than their (3) counterpars.
But what can you really do when all the necessary financial information of a company is presented in the S1? Retail investors have developed this strange notion that investing in common stock is this "easy" way to make money, when in fact it has always been an area where "you better know wtf you're doing". Do you prevent "clueless" people from buying shares at all? Do you similarly prevent "clueless" billionaires from buying Picasso paintings?
I mean you'd think that if the IPO price is too high, then the investors simply wouldn't buy. After all, if we consumers think a product is too expensive (whether it be a house, a car, or a phone), we'll exercise discretion and shy away from the purchase. The underlying issue (provided that the S1 information is reasonable and accurate -- which is one valid concern you raise) I think is the ignorance and unfounded optimism of the average retail investor towards IPO shares. TBH I don't see how this "retail investors getting wronged" phenomenon gets rectified unless these investors themselves become educated about basic investment principles.