Investors May Feel Unfriended by Facebook IPO
Friday, February 3rd, 2012When it comes to the initial public offering of Facebook, the world's largest social network, there's ironically very little for the masses. Facebook's IPO, as with most IPOs, will only be sold at the offering price to privileged investors. Most regular investors who want a piece of the company will have to wait until the shares start to trade on the stock market, possibly at a price much higher than at which they were offered to initial investors.
Facebook is following the traditional investment banking model for IPOs, which typically limits the number of individual investors who can get access at the IPO price. How it works:
The company will first file the prospectus, or S-1, a document that explains the details of the business and IPO. As regulators review the S-1, Facebook will then meet with large investors such as mutual funds and pension funds.
When it comes time for the shares to be sold, they're first offered to these large mutual funds and pension funds able to buy the largest amounts of stock. Meanwhile, the major investment banks leading the deal, specifically Morgan Stanley, may allow some of their best customers, typically high-net-worth individuals, to buy shares at the IPO price, says Jay Ritter, professor of finance at the University of Florida.
Once the stock starts to trade on the exchange, those privileged investors may then sell into the open market, where all investors may compete to buy the shares. Most likely, if demand is as strong as expected, the share price may jump, forcing regular investors to pay up for the shares.
There has been some effort by discount brokerage firms to offer IPO shares to customers. Fidelity, for instance, has offered more...