Yet another way to disrupt investment banks. Make every startup owner aware that the size of the "pop" on IPO day is the amount of money that the company failed to get and could have. Furthermore much of that money went to the investment bank that took you public, and that banker's close friends. In short, it is a form of theft.
Luckily there is an easy way to avoid this theft. And that is the Dutch auction IPO.
Note that Wall St really, really hates these. It took them some time to forgive Google for doing one. They result in less work for the investment banker, and avoid the hidden fee of having a first day pop.
1. IPO investors are taking on a risk by investing. For that they get a return. IPOs can drop on first day too.
2. The bank typically underwrites the IPO. That means if there is a shortfall, the bank kicks in the rest. That is a risk for which the bank gets a return.
3. By "close friends" you mean the bank's clients. If demand exceeds supply you can sure bet their best clients will be first in line.
4. A price band is determined ahead of time. Its required for the prospectus. Determining demand is aguessing game. Better to be oversubscribed than under.
5. Having the press of being oversubscribed is good for the bank and the company. Lookup the illusion of scarcity.
6. For the same reason a big day one jump is good for both and it sets the tone for the stock to the markets.
Auctions have been tried, famously with Google. Even then there was a big day one jump.
The thing is, Dutch Auction IPOs just don't usually work very well. They worked for google since it was a huge and well known name, but they don't work nearly as well for the long tail of AMEX.
Luckily there is an easy way to avoid this theft. And that is the Dutch auction IPO.
Note that Wall St really, really hates these. It took them some time to forgive Google for doing one. They result in less work for the investment banker, and avoid the hidden fee of having a first day pop.