IPOs increasingly welcoming small investors


Photo courtesy of JD Hancock

Photo courtesy of JD Hancock

Rob Swystun, Pristine Advisers

Going public is changing.

Once the domain of large institutions and investors, initial public offerings are becoming more democratized, according to a story by CNBC’s technology reporter Cadie Thompson.

Companies are increasingly opting to include employees, brand fans and customers in their IPO, Thompson says, allowing them access to shares at the same time and price as Wall Street.

GoPro, which makes wearable video cameras, said it would open its IPO to fans and customers. That IPO will include 17.8 million shares at a price of $21 to $24 each, according to documents filed with the SEC.

“While with most IPOs ‘friends and family’ are defined as a few select people, with our IPO, you’re all our friends and family,” GoPro CEO Nick Woodman said when he announced the IPO.

The direct-to-investor model is still relatively rare, but the shift to being more inclusive to individual investors is happening, said Barry Schneider, chairman and CEO of Loyal3, which makes small amounts of IPO shares available to investors who are usually shut out of the process.

“Whether it’s a user, or an employee or a supplier, every company has people that are passionate about it and that’s why Loyal3 exists,” he said, “to give small investors the opportunity to have access to IPOs and other companies at large.”

Loyal3 is helping to take GoPro public this year and has already helped take AMC Entertainment and Santander Consumer USA public and is scheduled to take four more companies public this year.

Loyal3 makes shares available to everyone by underwriting IPOs alongside the Wall Street banks. This makes it possible for investors with as little as $100 to get in on the investing action in the companies Loyal3 helps take public. The company also allows investors with as little as $10 to invest the opportunity to buy shares in companies using the Loyal3 platform. In addition to that, Schneider said, there are no fees to buy, sell or transfer stock.

“We want to help you put your toe in the water to start investing in companies that you care about and know about and over time eventually graduate to some bigger things,” Schneider said. “Two hundred million people could buy stock that are of age in the U.S., 35 million have brokerage accounts currently. Our interest is targeting the 165 million that don’t.”

Including small investors doesn’t always make for a successful IPO. Thompson gives the example of Vonage, which included small investors in its IPO back in 2006. The stock opened at $17 and fell more than 20% the first day. They now trade for under $4.

But Schneider insists this isn’t the norm.

“The presumption is IPOs are more vulnerable than normal stock and therefore why should an ordinary investor have that opportunity,” Schneider said. “But if you look at the facts, the structure of an IPO is to be priced at 15% discount to market and if you look at the returns over 10 years, on average they track higher. So I look at this and think that it’s an opportunity.”

And why shouldn’t small investors be able to take risks on IPOs if they want to, finance professor Aswath Damodaran, a finance professor at the Stern School of Business at New York University said.

“I don’t see these online platforms as doing something that bankers don’t do already. If they are going to attract small investors, and investors buy into their sales pitch, then that’s a chance they take,” Damodaran said. “If they want to play the game, let them play the game.”


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