The world of investing includes individual investors from many different walks of life, all with different opinions of what to invest in and all with varying levels of risk tolerance. There is one thing that most investors tend to hold in common though, the desire to make money on their investments. While any investment has risks, IPOs are attractive as a ground floor opportunity to purchase shares at the initial offering price . The desire to participate at the initial offering price is what attracts investors to Initial Public Offerings (IPOs), however, only a small percentage of individual investors have actually been able to participate in recent years. Knowing that only a small number of individual investors have participated begs the question “Who can invest in IPOs?”. Let’s do a quick break down and make it clear who is able to participate in an IPO.
First, we’ll discuss who CAN’T participate in IPOs based on industry regulations. FINRA, the financial regulatory authority, has rules in place to restrict certain persons. A restricted person includes a person in a position to influence the actions of a corporation or a person associated with a broker including any owner, partner, officer, director, branch manager, or employee. Relatives of the restricted person as well are typically included in these regulations as well. The FINRA rules generally prohibit a FINRA member or an associated person of a FINRA member from allocating new issues to any account in which certain “restricted persons” have a beneficial interest. More information on this can be found on the FINRA website, Rules 5130 and 5131.
The short answer to “who can invest in an IPO?” is quite simple: aside from restricted persons, any individual investor who considers the investment to be suitable is allowed to invest! So why is it so hard to participate in an IPO? It all comes down to supply, demand, and distribution methods. On the supply/demand side of an IPO, the lion’s share of the allocation, approximately 80% or more, goes to institutional investors. The problem has been that most offerings haven’t had a distribution model that includes individual investors on a large scale, so the remaining shares, approximately 20%, have been traditionally allocated to well-connected wealthy individual investors and hedge funds. Without a scalable distribution model to involve individual investors, this allocation method has become the norm, until now. Technology has now given the industry its first utility for large-scale retail distribution of public offerings via ClickIPO and individual investors now have a way to invest in IPOs! All that’s needed is to download the ClickIPO app from iTunes or Google Play and connect a supported brokerage account from within the app.
Risk of Investing in Initial Public Offerings (“IPOs”)
There are specific risks in investing in an Initial Public Offering (“IPO”). Among other things, the stock has not been subject to market valuation. Those risks are described at length in the prospectus, and we urge you to read the prospectus carefully to understand those risks before investing. An IPO is the first sale of stock by a private company to the public and may not be suitable for all investors. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. IPOs are a risky investment. For even experienced investors, it can be difficult to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values. Read more information regarding the significant risks associated with investing in IPOs.