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Investor Participation in Initial Public Offerings

During an initial public offering (IPO), shares of a company are sold to the public for the first time. To facilitate a typical IPO in the United States, a group of investment banks gauges demand for the IPO, determines the initial offer price for the shares, and allocates the shares among interested investors. Empirical studies have shown that in the moments after IPO shares begin trading, the market price of the newly public shares often, but not always, climbs above the initial offer price. This phenomenon suggests that many IPOs are “underpriced.” In the typical IPO, however, the only investors who receive shares at the initial offer price are large institutions or well‐connected individual investors. Because these select investors are able to sell the shares they acquire in underpriced IPOs for a quick profit, often at the expense of average individual investors, many commentators have criticized the process as being unfair. This Comment explores various explanations for IPO underpricing, reviews existing legislation regulating IPOs, and proposes that a small percentage of the shares of every IPO be set aside for impartial distribution among interested individual (or retail) investors. This Comment acknowledges that institutions deserve the majority of IPO shares, but suggests that providing retail investors, as a class, with broader access to IPO shares would increase perceptions of fairness in the market without upsetting the existing IPO framework.

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