People don't realize that a day 1 "pop" in share price of an IPO (sometimes 100% or more, like some of the recent ones) benefits only wall street, not the company itself. Big banks are, therefore, incentivized to underprice IPOs as much as they can get away with. And employees themselves are subject to long lockup periods. With the recent success of direct listings, cutting them out of the process is a logical step.
> banks are, therefore, incentivized to underprice IPOs as much as they can get away with.
But don't banks compete for the IPO business by telling the company what a high price they will list it for? That doesn't solve the problem of a bank saying they'll list for a high price, winning the bid, and then coming back later and saying that intervening events cause them to think it should be listed lower.
But presumably companies that are about to IPO have advisors/lawyers who can see these sorts of shenanigans coming and fight against them?
The story as it goes is that they need big investors to soak up a lot of the IPO so that they all sell. The brokerages cultivate a set of people who can pony up that money, and part of that cultivation is a history of good (profitable) interactions.
Thinking Fast and Slow asserts that humans use a different weighting system for upside and downside (making $10 does not feel as good as losing $10 feels bad), but it also asserts that people who look at finances and statistics for a living have a bunch less pronounced bias in this respect.
In the same way that it's worth some guy's time to climb into my tree for $250 bucks, and worth $250 to me to not have to make that climb, the investment houses should be profiting off of the difference between my speculative sense of risk in the situation versus their objective sense of risk based on expertise.
But that doesn't seem to be what happens with IPOs. It feels more like an Old Boys' Club, full of people who are as averse to loss as I am, maybe even moreso, demanding an experience that ranges from good to fantastical, instead of fair to excellent.
The good news is, that gap means there's space for competition. The bad news is that many of the people who might participate seem to be more motivated to stretch enough to get an invite to The Club instead. Someone is going to have to defect. A lot of someones...
"Big banks are, therefore, incentivized to underprice IPOs as much as they can get away with."
No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well.
The 'winners' are the folks who get to buy from the underwriting bank and that's opaque: it could be 'the same banks clients', and so they get some major favour points for those allocations, and their own private wealth managers would ostensibly get a cut, but that's quasi insider stuff.
The banks 'working with the IPO company' lose money with a price that's too low.
Even if you were to say 'oh, the other parts of the banks are working for some action' the answer to that is, well, bankers are 'very me first' and I don't care who it is, the underwriting team wants to make as much money as they can, it's their personal bonus, and they're going to maximize the price. They don't care about the 'private wealth management teams' bonuses, they care about their own.
AirBnB I guarantee literally had some of the world's best bankers on the case.
There's just a lot of variation in very frothy markets and it's hard to estimate demand from far flung corners.
I don’t want to defend the traditional IPO process too much, but “only” is a strong word. One possible benefit from a “pop” is that it makes it more likely for investors to want to participate in future IPOs. That is, the pop from an earlier IPO makes it easier for a later IPO to occur. Of course this isn’t benefitting the first company, but it is benefitting companies at large.
I’m just trying to offer some explanation, I still believe the process deserves modernization.
This is pretty non-sensical. Banks are incentivized to price IPOs at the highest possible price, their comps are directly linked to the proceeds.
If IPO pop was something nefarious, how do you explain IPO pop of Goldman Sachs stock? They ran their own IPO and you can be sure as hell that partners didn't want to leave any money on the table.
In general, IPO pop is an interesting phenomenon and it's not fully explained in the literature.
You hear a lot about the day 1 pop in share price but I really think the price is just the tip of the iceberg. I'm not sure what the trading volume is but I doubt that you could fill the entire IPO at the highest price on the IPO date.
From what I understand, supply is constrained as employees typically can't sell shares, and retail investors who were lucky enough to get in on the action are typically locked up for 60 days. Institutional investors are happy to hold on to alot of their shares because they can mark them to market and make their returns look great.
Unfortunately because the media gives such fawning press coverage to IPOs that "pop" the companies also want it to happen. No executive wants to have the IPO that dips on Day 1.
Now if they were thinking rationally they'd realize the extra funds raised from a high IPO price are worth much more than the positive media coverage from a pop, but we all know that people response irrationally to media coverage.
Yes and no. A pop means that shares sold were at a discount to their true value. At the same time, it's usually benefital to a company to have a high stock price for various reasons, and that benefit likely outweighs the downside of having raised capital expensively at the IPO (including having the ability to raise more capital much more cheaply in the future).
How does the listing status affect employees with lockups? If you can't sell for a month (or whatever), wouldn't you benefit from any increase in price immediately after listing? If the price when the lockup period ends is the same, why would an employee care?
I find myself aligning closely with Bill Gurley on this since it sure seems like Wall St. is just siphoning value off of their mispricing of tech IPOs. Bill's been a huge advocate of change and he's really enthusiastic about this, so seems like a really positive change:
Direct listing is the norm in many countries around the world for decades. In India for example it is called book building and is the norm since ~1998. The average underwriting fee is 1-2% and academic studies have calculated that underpricing came down substantially from fixed price IPOs.
The US is late to this shift but understandable as the US has the some of the oldest and largest markets which are resistant to change. The same process happened in the shift to electronic trading where US exchanges were the last to fully embrace electronic trading - looking at you NYSE ;) Also remember the big banks owned seats on the exchanges and the exchanges in turn and that removed any incentive for the exchanges to push for direct listings. The exchanges are now publicly traded entities so there incentives are no longer aligned.
The pearl clutching by institutional investors at this change is surprising. Perhaps they are chafing at losing preferential access to IPO allocations and having to compete with the rest of the retail investing public.
When the company is profitable and the eventual price is stable, sure it looks fine. But flip it around and pretend it’s a company like Ripple issuing an IPO (for dollars, not crypto scrip) and you realize the historical existence for these rules.
This is really good. I have been involved in this area of finance for over 2 decades and can attest that this process is broken. The bankers and traders pressure companies to benifit themselves and their clients at the expense of early investors and employees. I've seen cases where the IPO bankers made off with more than the employees themselves.
Could someone please explain this for a layperson such as myself? Why was Palantir one of the few companies able to do this before, and does that mean any company now can get listed on the stock exchange?
palantir didn’t raise new money. what they did was a secondary direct listing where existing shareholders just put their shares up for sale to create a public market for shares.
a primary direct listing was not allowed before this ruling. this means that companies can now both list existing shares for sale plus raise new money by auctioning off newly created shares instead of going through a traditional IPO.
Palantir was supposed to be a quiet little listing. The big institutions wanted to accumulate it at rock bottom prices before it's eventual rise into triple digits but the general public has caught on and it's getting pumped up.
Disclaimer: I bought 2500 shares at $11 and am up well over 150%.
What if the investors pay for the due diligence? The candidate company must be forced to be radically transparent while the auditor will be incentivized to provide value to the investor and be liable if there is missing info due to negligence or corruption.
I think if investors value the third party stamp of approval there are many ways to charge for it. Just because you don't have to pay an ibank doesn't mean you can't pay an ibank.
In all fairness there is a legit service provided by underwriters. Most companies offering IPOs aren't well-known tech companies with an informed market ready to buy. They're more likely totally unknown and lack investor interest. Making a direct sale without underwriter support (who will buy a portion of your offering to act as a market-maker and stabalize the price) can potentially fail to raise the necessary capital. Yes underwriters demand fairly steep fees, but they also take huge risks themselves.
The traditional IPO will still be available; so companies that feel the need for underwriters can do so, and the very public tech unicorns don't need to anymore.
About time plus plus with audited financials it’s not a trust issue. Don’t think this will massively increase public listings but it will certainly level the playing field and get rid of the first day pop. Especially now that companies are staying private longer this a huge benefit to the everyday investor.
This would be a great step, but an even better step would be ending the centralized gatekeeping of securities-related investment contracts, and respecting the right of grown adults to freely contract with each other.
A recent study on the ICO market on Ethereum found:
"The average ICO has almost 4700 contributors. The median contributor invests a relatively small amount. The ICO market appears to have successfully given access to the financing of innovation to a new class of investors, which is a long-standing public policy issue" [1]
People having the freedom to contract is true accessibility.
1. legal restrictions, in some states, prohibiting craft-beer brewers from selling directly to retailers or to the public, and requiring them instead to go through middleman distributors — and of course those wealthy distributors wield lots of political power (via state-legislature campaign contributions) to keep those restrictions in place; and
2. similar auto-dealership laws, in states like Texas, that prohibit car manufacturers (e.g., Tesla) from maintaining in-state showrooms of their own to sell directly to buyers — again, the wealthy middleman car dealers are politically powerful and have successfully lobbied hard to keep those dealership laws in place.
I don't know him and haven't heard much about him, but from the looks of it the CTO of the United States (yes, the CTO of the United States) is a shill for Palantir/Thiel (https://en.wikipedia.org/wiki/Michael_Kratsios).
As far as I can tell he is not GitHub nor HackerNews, nor does he know how to code, which I think would make someone quite unqualified for that position.
Again though, maybe he's a nice person. Just to me from the outside looks like a Palantir puppet.
So absent a banker, how are they gonna price their offerings? A bank does have Avery large book of institutions who are covered by active reps. A startup does not have a mechanism in place to run a road show, gauge investor interest and ultimately price the deal. While leaving a ton of money on the table is a legitimate complaint, pricing and selling a deal isn’t a simple problem.
Can someone comment on how significant this is, wrt tech startups choosing if/when to go public? My understanding is that tech startups are primarily delaying going public, because of the compliance requirements, and the short-term pressures of reporting their revenues/profits. To what extent are IPO fees holding them back?
I don’t think this changes whether a company decides to go public or not. This mostly helps “hot” private companies, mostly in tech, go public in a way that gives shareholders a chance to sell more shares on Day 1 and prevent bankers and investment banking clients from locking in an immediate return from a pop due to a mispricing at a price that is not available to other public investors.
[+] [-] mgraczyk|5 years ago|reply
Unlike Reuters, it actually includes a link to the SEC release that the entire article is about.
https://www.wsj.com/articles/sec-approves-nyses-plan-for-new...
[+] [-] dang|5 years ago|reply
(I'm sorry about the paywallness, but as long as there are workarounds it's ok, and people have posted workarounds in this thread.)
[+] [-] findjashua|5 years ago|reply
https://archive.is/20201222204815/https://www.wsj.com/articl...
[+] [-] neonate|5 years ago|reply
[+] [-] KerryJones|5 years ago|reply
[+] [-] paxys|5 years ago|reply
[+] [-] gnicholas|5 years ago|reply
But don't banks compete for the IPO business by telling the company what a high price they will list it for? That doesn't solve the problem of a bank saying they'll list for a high price, winning the bid, and then coming back later and saying that intervening events cause them to think it should be listed lower.
But presumably companies that are about to IPO have advisors/lawyers who can see these sorts of shenanigans coming and fight against them?
[+] [-] hinkley|5 years ago|reply
The story as it goes is that they need big investors to soak up a lot of the IPO so that they all sell. The brokerages cultivate a set of people who can pony up that money, and part of that cultivation is a history of good (profitable) interactions.
Thinking Fast and Slow asserts that humans use a different weighting system for upside and downside (making $10 does not feel as good as losing $10 feels bad), but it also asserts that people who look at finances and statistics for a living have a bunch less pronounced bias in this respect.
In the same way that it's worth some guy's time to climb into my tree for $250 bucks, and worth $250 to me to not have to make that climb, the investment houses should be profiting off of the difference between my speculative sense of risk in the situation versus their objective sense of risk based on expertise.
But that doesn't seem to be what happens with IPOs. It feels more like an Old Boys' Club, full of people who are as averse to loss as I am, maybe even moreso, demanding an experience that ranges from good to fantastical, instead of fair to excellent.
The good news is, that gap means there's space for competition. The bad news is that many of the people who might participate seem to be more motivated to stretch enough to get an invite to The Club instead. Someone is going to have to defect. A lot of someones...
[+] [-] jariel|5 years ago|reply
No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well.
The 'winners' are the folks who get to buy from the underwriting bank and that's opaque: it could be 'the same banks clients', and so they get some major favour points for those allocations, and their own private wealth managers would ostensibly get a cut, but that's quasi insider stuff.
The banks 'working with the IPO company' lose money with a price that's too low.
Even if you were to say 'oh, the other parts of the banks are working for some action' the answer to that is, well, bankers are 'very me first' and I don't care who it is, the underwriting team wants to make as much money as they can, it's their personal bonus, and they're going to maximize the price. They don't care about the 'private wealth management teams' bonuses, they care about their own.
AirBnB I guarantee literally had some of the world's best bankers on the case.
There's just a lot of variation in very frothy markets and it's hard to estimate demand from far flung corners.
[+] [-] pgwhalen|5 years ago|reply
I’m just trying to offer some explanation, I still believe the process deserves modernization.
[+] [-] nemanja|5 years ago|reply
If IPO pop was something nefarious, how do you explain IPO pop of Goldman Sachs stock? They ran their own IPO and you can be sure as hell that partners didn't want to leave any money on the table.
In general, IPO pop is an interesting phenomenon and it's not fully explained in the literature.
[+] [-] jklein11|5 years ago|reply
From what I understand, supply is constrained as employees typically can't sell shares, and retail investors who were lucky enough to get in on the action are typically locked up for 60 days. Institutional investors are happy to hold on to alot of their shares because they can mark them to market and make their returns look great.
Edit: clarified first paragraph
[+] [-] habosa|5 years ago|reply
Now if they were thinking rationally they'd realize the extra funds raised from a high IPO price are worth much more than the positive media coverage from a pop, but we all know that people response irrationally to media coverage.
[+] [-] unknown|5 years ago|reply
[deleted]
[+] [-] kenneth|5 years ago|reply
[+] [-] mayneack|5 years ago|reply
(I don't know how it works, I'm actually asking)
[+] [-] mikeyouse|5 years ago|reply
https://threadreaderapp.com/thread/1341438991401242625.html
Edited with threadreader link: Thanks toomuchtodo
[+] [-] unknown|5 years ago|reply
[deleted]
[+] [-] myth_buster|5 years ago|reply
0: http://abovethecrowd.com/2020/08/23/going-public-circa-2020-...
[+] [-] haltingproblem|5 years ago|reply
The US is late to this shift but understandable as the US has the some of the oldest and largest markets which are resistant to change. The same process happened in the shift to electronic trading where US exchanges were the last to fully embrace electronic trading - looking at you NYSE ;) Also remember the big banks owned seats on the exchanges and the exchanges in turn and that removed any incentive for the exchanges to push for direct listings. The exchanges are now publicly traded entities so there incentives are no longer aligned.
The pearl clutching by institutional investors at this change is surprising. Perhaps they are chafing at losing preferential access to IPO allocations and having to compete with the rest of the retail investing public.
[+] [-] Ziggy_Zaggy|5 years ago|reply
[+] [-] drcode|5 years ago|reply
[+] [-] koolba|5 years ago|reply
[+] [-] lostsoul8282|5 years ago|reply
This is a step in the right direction.
[+] [-] sova|5 years ago|reply
[+] [-] tempsy|5 years ago|reply
a primary direct listing was not allowed before this ruling. this means that companies can now both list existing shares for sale plus raise new money by auctioning off newly created shares instead of going through a traditional IPO.
[+] [-] xwdv|5 years ago|reply
Disclaimer: I bought 2500 shares at $11 and am up well over 150%.
[+] [-] Triv888|5 years ago|reply
[+] [-] gostsamo|5 years ago|reply
[+] [-] mchusma|5 years ago|reply
[+] [-] sjg007|5 years ago|reply
[+] [-] boh|5 years ago|reply
[+] [-] perlgeek|5 years ago|reply
Best of both worlds, no?
[+] [-] trident1000|5 years ago|reply
[deleted]
[+] [-] an4rchy|5 years ago|reply
Going forward, are there any other benefits to choosing a SPAC over this direct listing approach?
[+] [-] dbmikus|5 years ago|reply
[+] [-] raiyu|5 years ago|reply
[+] [-] CryptoPunk|5 years ago|reply
A recent study on the ICO market on Ethereum found:
"The average ICO has almost 4700 contributors. The median contributor invests a relatively small amount. The ICO market appears to have successfully given access to the financing of innovation to a new class of investors, which is a long-standing public policy issue" [1]
People having the freedom to contract is true accessibility.
[1] https://link.springer.com/article/10.1007/s11408-020-00366-0...
[+] [-] dctoedt|5 years ago|reply
1. legal restrictions, in some states, prohibiting craft-beer brewers from selling directly to retailers or to the public, and requiring them instead to go through middleman distributors — and of course those wealthy distributors wield lots of political power (via state-legislature campaign contributions) to keep those restrictions in place; and
2. similar auto-dealership laws, in states like Texas, that prohibit car manufacturers (e.g., Tesla) from maintaining in-state showrooms of their own to sell directly to buyers — again, the wealthy middleman car dealers are politically powerful and have successfully lobbied hard to keep those dealership laws in place.
[+] [-] LatteLazy|5 years ago|reply
Edit: Drocer88 correctly points out below that reverse takeovers have always been legal!
[+] [-] snoshy|5 years ago|reply
[+] [-] cgrusden|5 years ago|reply
[+] [-] deviation|5 years ago|reply
I guess it doesn't matter how much cash you're bleeding if the underlying product (the company) is increasing in value.
[+] [-] unknown|5 years ago|reply
[deleted]
[+] [-] breck|5 years ago|reply
As far as I can tell he is not GitHub nor HackerNews, nor does he know how to code, which I think would make someone quite unqualified for that position.
Again though, maybe he's a nice person. Just to me from the outside looks like a Palantir puppet.
[+] [-] sfkdjf9j3j|5 years ago|reply
[+] [-] JackFr|5 years ago|reply
[+] [-] whack|5 years ago|reply
[+] [-] tempsy|5 years ago|reply
[+] [-] known|5 years ago|reply