Facebook’s highly vaunted IPO was supposed to be a shining moment for American entrepreneurship. Instead, disaster struck: Nasdaq systems couldn’t list the stock on time, would-be investors grew angry and impatient, and the actual share price–pegged at $38, thanks to seemingly strong demand–plummeted 20% within two trading days of its debut.
Now investors are suing Facebook and its bankers, alleging that they disclosed information selectively to give preferred clients an unfair advantage. Meanwhile, top U.S. regulators are investigating exactly what Facebook’s lead underwriter, Morgan Stanley, shared with clients pre-IPO.
All told, what should have been a triumph for Wall Street ultimately reinforced its most damning stereotypes: that IPOs are engineered to maximize venture-capital profits and banking fees at the public’s expense and that its systems have become too complex to manage. “Unless the exchanges can convince people that the process is fair,” warns Bob Henderson, a partner at financial-law firm Polsinelli Shughart, “they may not want to go back in.”
So what–if anything–can restore investor confidence? Here are three IPO processes that could function better than Facebook’s.
1 Auction shares to anyone
In a “Dutch auction” process, which Google used to go public in 2004, would-be investors bid whatever they want (above a minimum clearing price) on a select number of shares; highest bids are filled first. That way, average joes get the same access as Wall Street insiders, and the IPO reflects market demand. Google’s Dutch auction worked well over the long term: the company’s shares have soared nearly 500% since it went public.
2 Let pros set the price
Casual investors might want to buy IPO stock, but most don’t know anything about valuing a company. In a two-stage IPO, as used by European mobile company Orange in 2001, they don’t have to: the share price is set by experienced institutional investors, then the stock is offered to everyday folks at a slight discount. It’s a great way to avoid a “retail frenzy” based on hype, says Tim Jenkinson, a finance professor at Oxford University.
3 Increase transparency
In the U.S., analysts at the banks underwriting IPOs are legally barred from publishing reports about them for at least 40 days, meaning the general public can’t benefit from their expert insights. Not so in Europe, where top-notch research–about risk level, market potential and more–is available even before a company goes public. It’s then shared quickly and widely, which helps assuage concerns and “create a level playing field,” says Jenkinson.
SIX START-UPS ON THE PATH TO GOING PUBLIC–WITH BETTER RESULTS
The cloud-based storage service already touts 50 million users and $257 million in funding
Its sleek, affordable accessories (see: the Jambox speaker) have become this year’s tech must-haves
The luxury flash-sales site offers deals from Christian Louboutin, Marc Jacobs and Cynthia Vincent
Its credit-card-reader smart-phone attachment is revolutionizing the payment industry
The U.S. rent-your-home platform has booked 5 million nights and plans further global expansion
It aims to turn Angry Birds, the world’s biggest mobile game, into a multimedia franchise
By Sam Gustin