Page 192 - Initial Public Offering - An Introduction to IPO on Wall Street

pump into the round during the offer time; only during the allocation time are the sums raised
and obtained made clear.

13.1.4 Allocating the Shares
The role of the broker is to make sure that the business raises the sum it needs to float and
conduct its planned activities. A broker may also take more orders for stocks than shares on
sale to ensure that the target amount is reached. This is why you might have an
'oversubscribed' offer.

If this occurs, investors will not obtain their full share order, but instead a broker-determined
allocation. Allocation is often a straight-line, i.e. everyone gets the same proportion of what
they have requested. However, there are also situations where there is a limit on the amount
that someone will earn, as was the scenario when the UK government sold shares in Lloyd's
Bank. And sometimes there is a mix or combination of these two allocation types.

13.1.5 Admission to the Market
The stock will be introduced to the market after the shares have been allotted and all the ’i's
have been signed and t's crossed, and traders will purchase and sell on the open market. A
few of the larger investors may sometimes be unable to sell shares on admission because
there may be a holding period linked with their purchase.

This is also used to avoid the market from being overwhelmed with shares, especially for
smaller businesses, which would trigger the share price to drop dramatically. Besides larger
investors, founders and staff are also held to a holding period during which they cannot trade.
Rarely does this holding period extend to institutional investors, those who have bought
shares in the open offer.

13.2 Why Investors are interested in an IPO
The following are the two main reasons investors may be interested in an IPO.

13.2.1 The Bump
The 'IPO bump' is a phrase used for the immediate increase in the share price a stock
experiences shortly after listing. In 2016, Seeking Alpha announced that the bump was 141
20
percent for biopharmaceutical firms, an impressive return if you can get it. But the fact is
that for every business that gets a positive bump, many others don’t or, worse, go the other
way.

13.2.2 The Hype
The media likes to report IPOs of tech and not-so-tech stalwarts; you can see a lot of
coverage in the press if there are IPO reports of a possible business float. Rumors are great,
but they may not always materialize, and when they do, the excitement around the business
can contribute to interesting effects on the share price.

20 https://seekingalpha.com/article/4216857-biotech-bumps

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