Who actually gets shares at the offering price, and why it is very unlikely to be an individual. This is the part of the subject that most affects an ordinary reader, and the SEC states it without hedging. The underwriters and the issuing company control the process and "have wide latitude in allocating IPO shares," and "the SEC does not regulate the business decision of how IPO shares are allocated." Shares are distributed through an underwriting syndicate whose members do not receive equal allocations, the split between institutions and individuals is decided before trading starts, and, in the agency's own words, "most underwriters target institutional or wealthy investors in IPO distributions." When an offering is in heavy demand, underwriters "usually offer those shares to their most valued clients." Several online brokers do offer IPO participation, but the SEC notes they often have only a small allotment, so an individual's ability to buy at the offering price is limited whichever firm they use.
So the retail decision is almost never the one being described. There are two ways to buy into a new public company. The first is to be an underwriter's client and buy at the offering price. The second, which the SEC calls more common for individual investors, is to buy the shares when they are resold in the public market in the days that follow. Those are different prices and different bets. The SEC warns that the offering price "may bear little relationship to the trading price," that it is "not uncommon for the closing price of the shares shortly after the IPO to be well above or below the offering price," and that underwriters can support the trading price in the first few days with their own buying, after which "the stock price may decline significantly below the offering price."
The registration is public, free, and more informative than anything else available. A company undertaking an IPO files its Form S-1, and its amendments marked S-1/A, on the SEC's EDGAR database, followed by a final prospectus usually identified as a 424B3 or 424B4 filing that carries the settled offering terms. For a company with no reporting history, the SEC observes that the information capable of informing a decision "often can only be found in the prospectus." That is a rare situation in investing: the single most useful document exists, is written under liability for its accuracy, and costs nothing to read.
What the SEC's involvement does and does not mean. Staff review the registration statement for compliance with disclosure requirements and frequently require revisions. When the review is complete the staff issues an order declaring the statement effective. The agency is explicit that this "does not represent an approval of the merits of the IPO or an indication that the information disclosed is complete or accurate," and that the staff does not evaluate the merits of any offering. Effectiveness is permission to sell, not a verdict on the company.
Three supply facts that move the early price and have nothing to do with the business. The shares trading on the first day are generally only the shares sold in the offering. Other outstanding shares are often held by founders, employees and early investors and cannot be sold yet, either because they are restricted securities or because their holders have signed lock-up agreements, which the SEC says most commonly run 180 days and which must be disclosed in the registration documents. Underwriter policies that discourage flipping, the practice of immediately reselling allocated shares, restrict the float further. The SEC describes the combined effect as market overhang, and notes both that limited supply against high demand can drive the price steeply up and that the price may decline over time as restricted shares become available, sometimes sharply when a lock-up expires and a large block becomes sellable at once.
A detail worth checking in any prospectus you read. Some offerings include shares held by existing owners, described as selling shareholders, who may include founders and management. The SEC notes that the proceeds from those sales go to the selling shareholders rather than to the company. The cover page discloses how many shares they are selling, and a later section discloses how many each of them holds before and after. A large insider sale is not by itself damning, but it is a fact about the transaction that the registration statement is required to make available.
Two adjacent routes to a listing, named only to keep them apart. A direct listing places existing shares on an exchange without a capital-raising offering, and a merger with a special purpose acquisition company reaches a listing by a different mechanism again. Neither is an initial public offering in the sense used here, and each carries its own disclosure.
