It’s an IPO gold rush—and investors want in on the action.
The IPO market has been booming—with brands such as airport security company Clear Secure and China’s ride-hailing app Didi Global on the trading block. There were 727 public offerings in the first three months of this year alone, raising $202.9 billion, according to PwC research.
But investing in an IPO can be easier said than done—particularly for someone looking for access to a company’s initial market debut. Those original shares are rationed, and it’s competitive for institutions and DIY investors to get in on the game. “Besides it being risky, it’s an awfully time-consuming affair,” says Kathleen Smith, cofounder of IPO research and investment company Renaissance Capital, on incorporating IPOs into an investing strategy.
There’s no guarantee an IPO will be a good investment, either, and the Securities and Exchange Commission warns investors that stock prices can sometimes swing drastically during a company’s first days in the public market. But while it may be challenging for retail investors to get access to initial shares, it’s possible. Here’s how it works—as well as how you can invest in or get exposure to a company that’s going public.
Invite only
To get early access to an IPO, you need an invite—which can come from either the company itself, an underwriter (the party helping set the price and buy and sell the securities), or increasingly your own brokerage firm.
These initial shares are typically rationed out to institutional investors or high-net-worth individuals, according to Smith. But in some cases, companies that are going public may give certain individuals the opportunity to participate in their IPO. At the end of last year, Airbnb set aside 3.5 million shares particularly for hosts on its platform. On its first day of trading, Airbnb’s stock jumped to $160 from $50, an 135% increase from its IPO price.
Underwriting firms may give their clients the option to participate in an IPO, too, although shares are usually distributed to clients like hedge funds, pension funds, mutual funds, or insurance companies, according to the SEC. Brokerages including Fidelity Investments and Charles Schwab get allocated shares from underwriting companies and sometimes allow retail investors to purchase them, although there can be minimums.
There’s been a push lately to expand the pool of participants who can snag initial shares to include lower-income investors. In recent months, both Robinhood and personal finance company SoFi have come out with IPO platforms that give the everyday investor access.
In May, medical apparel company FIGS allocated about 1% of its 22.5 million shares to Robinhood—the brokerage’s first IPO shares offered to clients. Robinhood is currently offering IPO shares of Duolingo, the language app and website, to customers. It’s also planning to allocate 20% to 35% of shares from its own IPO to retail investors, the company said in its regulatory filing to go public.
SoFi, which launched IPO access to its customers at the end of March, has acted as an underwriter for the deals it’s made available to customers, according to a a SoFi spokeswoman. Available now: Social Capital Suvretta Holdings Corp. I, which will focus on the neurology subsector of the biotechnology industry; and Portage SPAC, which will focus on financial services. SoFi itself went public last month in a SPAC deal.
Brokerage industry regulator FINRA (the Financial Industry Regulatory Authority) has its own restrictions on who is allowed to invest in an IPO, including whether individuals or their immediate family members work at a broker-dealer. Access looks different depending on the brokerage. At Robinhood, it’s a random lottery system. Fidelity says its customers are evaluated and ranked based on their assets and the revenue they generate for the company.
“Typically, customers with significant, long-term relationships with their brokerage firm will receive higher priority than those with smaller or new relationships,” a Fidelity spokesperson said in a statement.
There can also be what are called “flipping” policies, which discourage investors from quickly selling IPO shares within the first few weeks after they are purchased.
Because shares are limited, and getting them is competitive, an easier option for investors may be simply to wait until shares are resold in the market. After an IPO, investors can place standard orders with their brokerages to buy shares—just as they would with any other stock.
Certain ETFs can also help investors capture exposure to IPOs after they’ve debuted without requiring concentrated risk in individual stocks. Renaissance Capital has two ETFs, the Renaissance IPO ETF (IPO) and Renaissance International IPO ETF (IPOS). The ETFs are passive, tracking an index that weights newly public companies based on their size.
Managing risk
It’s important for investors to consider the risk of their investments, according to Smith: Investing in an IPO can be perilous.
While markets are doing well, about 60% of IPOs are going to be trading above their offering price, Smith states. When the stock market goes down, the reverse happens, she says. “It can be disappointing.”
Stocks can be prone to wild fluctuations in their first day on an exchange—and into the first few months or longer, as was the case for Facebook.
A company’s operating metrics, management, and key stakeholders, all of which the SEC requires private companies to disclose publicly in a filing called an S-1 prior to an IPO, can be useful tools to help investors predict what the future results of a company may look like after its public debut. Things to consider, according to Fidelity: unproven management and debt levels.
“Each IPO is unique, and it needs to be evaluated independently to determine its investment potential,” the Fidelity spokesperson said.
This kind of analysis can take a lot of time, warns Smith, so investors need to weigh whether their time may be better spent elsewhere.
“The effort put in may not be worth the result,” she says.
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