richard wrote:There are at least two issues here:
- sometimes stocks go up, sometimes they go down. To complain that you thought it would go up and it went down is silly
- there are allegations that FB selectively disclosed material negative information about its prospects to institutions, leaving small investors with a misleading impression. To the extent this is true and these small investors relied on what they were told and would not have bought with fuller disclosure, that's much less silly
I think under US law, latter could be fraud?
(Richard I know you know the below, this is more for general discussion)
They upped the price and size of issue only days before, which smacks of getting greedy (or scared about business prospects).
The IPO discount exists because companies need to raise new capital from investors who are worried about getting legged over. There is a huge information asymmetry in a company going public between private shareholders and new, incoming shareholders. The process of private funding rounds pre IPO and a private market for shares, that existed with Facebook, definitely blurred the issue.
Countries and systems that have tried to fix the IPO system to abolish the discount (eg the Google auction at IPO) have basically not worked. The big issues are all done book build by the lead managers and the syndicate (Ie US style).
However US IPO fees ar c. 7% of money raised, Europe c. 4-5%, Asia c. 3%. No one has convincingly explained why, on US markets, companies (and therefore shareholders) should pay so much more.
Generally investment banking is a risk business. A lot of IPOs get pulled, and lawyers cut their fees (but still get paid something) and ditto accountants. Investment banks get basically nothing for all that time and work. Investment banking is a big overhead operation.
If the IPO goes ahead then it is still risky.
Underwriters, Green Shoe notwithstanding (legalized price manipulation in the first 30 days post IPO), take significant risk that the shares will not be sold at the price they buy them from the IPOing client, on the other hand, they may negotiate excessive discounts from IPO companies for doing that.
Without the current system, companies (as Google found), would likely have to issue new equity at quite large discounts to attract investors.
Secondary offerings (which in the UK are all preemptive, ie shareholders usually get first crack) are typically done at 20-40% discounts to existing stock price. That's for a company with a quoted track record where the due diligence has already been done.
Since the whole operation is 'bespoke' and one IPO is not what another IPO is (the product, ie the company's stock, can be completely different) you get specialized intermediaries (investment banks) who charge big fees on the ones that work.
it is not a market ripe for disintermediation.