It’s getting easier for regular people to invest in what was once one of Wall Street’s most exclusive domains: an initial public offering.
Trading startups Robinhood Markets and Social Finance are looking to offer clients the chance to buy IPO shares early, instead of after they hit the market. Companies planning to go public — like London-based delivery app Deliveroo, which debuted Wednesday — are giving customers access to pre-IPO stock. And fast-growing blank-check firms known as SPACs are a back-door way for some individual investors to get in on an IPO.
All that is wresting some power out of the hands of big Wall Street banks, which for years have doled out shares to their favorite clients, in some cases simply as a courtesy for doing business.
In other parts of the world, particularly in Asia, so-called mom-and-pop investors have more access to the IPO market. In some countries, companies are even required to allocate a significant chunk of their offer-price shares to such retail traders.
But in the U.S. and the U.K., with a few exceptions, participation in large IPOs has long been restricted to hedge funds, professional asset managers and the wealthy. Retail investors were excluded from 93 per cent of major London listings between October 2017 and October 2020, according to research from Hargreaves Lansdown Plc.
IPO shares can be attractive because of first-day price “pops” that get a lot of attention. Over the past few months, shares in several well-known companies have soared on the first day of trading. Between 1980 and 2020, the average first-day increase was 18.4 per cent, according to Jay Ritter, a University of Florida professor who studies IPOs.
But people who bought early shares in Deliveroo’s float on Wednesday learned how risky an IPO can be when the stock tumbled 26 per cent by the close on the first day of trading. It fell further on Thursday, and was down about 2 per cent as of 1:39 p.m. in London. Long term, the investments might not be smart: Excluding first-day performance, IPO shares underperformed the market by 15.8 per cent after three years, according to Ritter’s data.
When Airbnb Inc. shares opened up 115 per cent in December, it wasn’t just investment banks and their clients that made a killing. The company had invited hosts like Kelly Lyons, of New York City, to buy a limited amount of shares at the IPO price of US$68.
Lyons purchased close to US$14,000 — the maximum she was allowed — of pre-trading shares of the Nasdaq listing. She is an active trader who previously worked as an investment banker, and she believes in the company.
“I feel like I have an ‘in’ in understanding how Airbnb improves the lives of hosts and how passionate people are about it,” she said.
Her portfolio year-to-date is up around 40 per cent, which she attributes primarily to her Airbnb holdings, she said. She says she’s even more loyal now to the brand.
Some see these offerings as marketing gimmicks, or at best a perk that also could strengthen loyalty to the brand. Customers-turned-investors say that, indeed, they feel more connected to the companies.
“It’s like you’re part of the team and you can cheer them on,” said Dan Scagnelli, a 36-year-old from London who bought 500 pounds (US$690) worth of shares in Deliveroo before it went public. Scagnelli says he is excited about Deliveroo’s future and beeps his horn when he sees delivery riders out on their bicycles around town.
Before Deliveroo’s trading debut, he told Bloomberg in an interview that he planned to hold onto the shares for months.
“Normally my holding period is seven months to longer,” he said. “I classify myself to a medium-longer term investor.”
After the shares fell, he was sanguine.
“It’s okay, I have strong diamond hands, and this isn’t the time for paper hands,” he said, using slang for people who hold onto shares, despite dips. “It’s only paper losses today — although it’s not good PR, and I feel for the customers whose first investment it may have been.”
Deliveroo customers who bought in early aren’t allowed to sell for a week, illustrating the importance of finding out the terms of the deal before agreeing to purchase pre-IPO shares. Airbnb hosts, however, could have sold right away.
Ritter says these kinds of company stock offerings can help prevent customers from jumping to competitors. Similar to employee stock options, they give people a sense that their own fortunes are tied to the success of the company.
“If the stock price rises, it creates goodwill for both consumers and employees,” Ritter said. “If the stock price drops, however, it can backfire.”
That happened in 1995, when Boston Beer Co. — the Samuel Adams brewer — sold 990,000 discounted shares to customers using coupons affixed to its six-packs. Fitting for the times, customers were able to mail in checks to buy 33 shares of the company for US$15 each. A year after the IPO, shares dropped as low as US$9.75. By 1998 they sagged to US$6.50.
Owning too much in a hot startup can be risky, particularly if shareholders also use the company to generate income.
“My rule of thumb is that you want no more than 10 per cent of your investable assets in any one company stock,” said Sarah Behr, founder of Simplify Financial in San Francisco.
The developments come as the U.S. Securities and Exchange Commission grapples with how to regulate the surge of regular people risking their money in aspects of securities markets that have long been the domain of Wall Street pros.
During the Trump era, former SEC Chairman Jay Clayton wanted to increase mom-and-pop access to private equity and other assets that have long been considered more risky. President Joe Biden’s pick to lead the agency, Gary Gensler, is expected to be more receptive to investor-protection concerns and reverse some of those moves once he’s confirmed by the Senate as early as next month.
Meanwhile, Allison Herron Lee, the agency’s acting chair since January, has expressed concern over how ordinary investors have been affected by recent wild swings in stocks like GameStop Corp. and the white-hot market for SPACs.
Some non-professional investors have been buying shares in these special-purpose acquisition companies, which are publicly traded shares in a company that has said it intends to buy another company and take it public, avoiding a drawn-out IPO process. About five new ones a day have been popping up this year, prompting concerns about bubbles.
New investors hoping to take advantage of a pop might be disappointed to find that they have to hold their equity longer than the first day, so Simplify Financial’s Behr recommends consulting company disclosures to find out exactly when shareholders can sell.
In the past, brokerages, by and large, haven’t rushed to give access to all clients. “IPOs are not for everybody,” a spokeswoman for Charles Schwab & Co. told the Wall Street Journal in 1999, when explaining why only clients with, say, US$500,000 on hand were worthy of buying such shares.
These days, a notification on Schwab’s site says the company doesn’t offer IPO shares. At Fidelity Investments, clients need between US$100,000 and US$500,000 in assets outside of 401(k) retirement savings to buy shares in certain offerings.
ETrade Financial Corp. has stood out for providing non-millionaires a way to buy pre-IPO shares. Now, it will only sell shares in offerings underwritten by Morgan Stanley, which agreed to buy the online brokerage in February 2020 for US$13 billion.
For now, IPOs have a certain exclusive appeal.
“It felt pretty cool to say I participated in the IPO,” Lyons said. “I wish that they had allocated more shares.”
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