Average investors tend to get left on the sidelines in favor of big funds when it comes to investing in initial public offerings at their offer price, which can often be considerably below where the stock ends up trading as time goes on. Only a small percentage of retail investors even know how to buy IPO stock at the company's go-public price.
"It's generally a mysterious process for the average American," says Darren Marble, who as co-CEO of Crush Capital is aiming to democratize initial public offerings by bringing them to the masses with a reality TV show.
The show, called "Going Public," will stream on Entrepreneur.com and feature episodes of small companies attempting to raise money. Viewers can invest in the companies -- via their computers, smart TVs or app-enabled devices -- at the IPO price for their debut on the Nasdaq stock exchange.
These will be Regulation A+ IPOs -- named for regulations from the Jumpstart Our Business Startups (JOBS) Act of 2012 that broadened the pool of eligible investors for private companies -- and these offerings will be much smaller than many other IPOs.
It can be much more difficult for average investors to buy shares in a traditional IPO at the offer price so that they can take part in the potential run-up in share prices once the company goes public.
Why Are Traditional IPOs So Exclusive?
With traditional IPOs, companies that want to go public hire investment banks to sell shares.
The investment banks can team up to form syndicates, with each bank getting a certain number of shares. The banks offer the lion's share to big institutional investors like pensions, endowments or hedge funds in what is called a "road show." Retail brokerages can end up getting shares, but they may make up only 10% of the allotment.
Most IPOs are done this way, but there is another type of IPO that gives retail investors a better chance of getting shares, known as the Dutch auction IPO. Instead of book running by investment bankers to try to secure a price, investors enter the price they're willing to pay for shares via a website in a similar way to how Treasurys are bought.
But these types of auctions aren't very popular with companies going public, says Susan Chaplinsky, a professor of business administration with the University of Virginia's Darden School of Business. These auctions tend to price company shares at the lower end of the prospectus range, she says. And retail investors have to know that the IPO is approaching, she says.
For traditional IPOs, the ability for the average investor to get in on the action depends on their brokerage, says James Angel, associate professor with Georgetown University's McDonough School of Business.
Those with a brokerage account at one of the big banks have a better chance. Outside of the big banks, full-service brokers with larger amounts of assets under management offer better chances of getting in on an IPO than the bare-bones, do-it-yourself-oriented online brokerages.
The shares that brokerages do have tend to be allocated to better customers, says Angel. You'll generally have a better chance of getting IPO shares the more you trade and the higher your account balance is.
Make sure to search your broker's website for what requirements you need to meet and what hoops you'll have to jump through if you want to buy IPO shares at their offer price.
For example, requirements to participate in an IPO via Fidelity include having either $100,000 or $500,000 in retail assets, depending on what companies are sponsoring the IPO.
IPOs Are Risky
One thing investors should ask themselves is whether they really want to invest on the ground floor of an IPO at all.
During a roadshow, the stronger the demand from institutional investors, the less that will be available for retail investors, Chaplinsky says. The shares that trickle down to average folks can be the ones that "the smart money has declined," she says.
Also, there is now less underpricing than there was in the days of the dot-com bubble, meaning that buying a stock at the end of its first day or waiting a few days doesn't have to be as big of a disadvantage as it once was, Chaplinsky says. Companies can also have trouble maintaining their offer price if their valuation in the private market was more than what the public market is willing to pay, she adds.
Further, in the past, evidence has shown that in general investors would be better off buying shares in a more-seasoned company as there is a lot of risk in young companies, she says. That might be less of an issue nowadays as companies are going public later after more venture capital investment and additional years of development.
"You need to scrutinize these companies carefully," she says. "Just because they're coming public doesn't mean they're all going to survive and grow to be Facebook."
Matt Whittaker began writing for U.S. News & World Report in 2015, covering investing topics. Based in Colorado, he also specializes in natural resources and outdoor industry journalism. Mr. Whittaker has reported on renewable energy, coal, oil, natural gas, metals and seafood companies from the Americas, Europe and Asia, and his work has appeared in The Wall Street Journal, Barron's, Pacific Standard, VICE Sports, Backpacker online and High Country News. He has been a fellow with the Knight Center for Specialized Journalism and is particularly proud of an Overseas Press Club Foundation scholarship he won for a series of articles on landmines in Bosnia and Herzegovina. Born in Knoxville, Tenn., Mr. Whittaker graduated with a degree in journalism from the University of Tennessee. You can follow him on Twitter and connect with him on LinkedIn.