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photo credit: By mmmmay lee

How to Get a Hot New IPO and Why You Did Not Get One

Ever wonder how you can get shares of a hot IPO – initial stock offering?   Here’s the scoop.

When a hot company’s IPO opens to the market,  both institutional and retail investors clamor to get a piece of the pie.

Who are investors like you and me?   Wall Street calls us “retail” investors.

When a hot stock comes out, everyone wants to jump on the bandwagon and buy it for a “quick” ride up.  What most people don’t understand is that the normal investors don’t stand a chance at ever getting in on a hot IPO before it hits the market except for special circumstances.

Investment banks are marketing businesses.  It’s their job to take a company public by selling an image to the investing world and build a market for the shares.   Not all of their IPOs are going to be good.  In fact, some are really awful but you just don’t get to know about it.

Here are some of the ways that you get a hot IPO:

At the institutional level

An example of an institutional customer would be a mutual fund asset manager or a public pension fund.

1.     Be a good institutional customer of the investment bank that’s managing the IPO.   The managing investment bank is going to keep the bulk of a good IPO and offer it to their best institutional customers.  This is how you keep customers.  You thank them by giving them special treatment.

Banks depend on the volume of revenue that is generated by institutional customers so those companies will always be more important than the average investors who brings in a few hundred dollars a year in gross revenue.

2.    Be a senior executive at one of the institutional investors. A company is run by people.  The people in charge of making decisions about where the company’s business goes will always get special treatment.   No one wants to upset the person who is holding the checkbook to your monthly billing.

3.    Other investment banks. This is when negotiations starts going into play.   These banks are going to make gentlemen’s agreements for future business.   It’s about “you scratch my back and I’ll scratch yours”.    Mostly, the deals are:  I’ll give X portion of this hot IPO in return for you taking X portion of this not so hot IPO and help me build the market for my client.

4.    Institutional clients of investment bank partners. There are always a small portion that will be shared with other non participating investment banks.   How it gets handed out is usually dependent on revenue and profits.   The most valuable customers are always going to get preferential treatment.

At the company level

This is nepotism at its best.  When a company goes public, it’s to cash in on all the hard work and risk from building the company.  How many shares you get really depends on your connections and how the company wants to distribute its largesse.

Many start up companies currently compete by offering stock options in the business as an offset for not being able to pay an expert at their market rate.   You can get some amazing executives with this technique.

1.     Be an executive or key employee at the company.

2.     Be an investor in the company.

3.     Be a family member of the owners, executives, or investors of the company.

4.     Be a good friend of the owners, executives, or investors of the company.

5.     Be a regular employee at the company.

Keep in mind that for most people going this route, especially employees, you will have restrictions on when to sell the stock.    Any planned stock trades need to be approved and disclosed before the IPO hits the market.   This timing issue affects your “profit” and future wealth.

Several years ago, I reviewed a prospective client’s portfolio.  “Joe” had a heavy concentration of one particular penny stock (stocks with price under $10).   He had sold his company to a competitor who was going public.   The deal was made with equity in the other company and gave him a margin in addition.

This meant that he sold his company for $8 million in stock shares based on $22/share even though the company was taking the share public at $25/share.

He was thrilled and had planned to retire after the IPO goes to market.   However, there was a slight hitch.  His adviser didn’t tell him about the contractual and SEC (Security Exchange Commission) restrictions.    Some of the SEC restrictions can be found under Rule 701 or Rule 144.    Most people are going to be affected by Rule 144.

There was a delay in when he was allowed to sell the shares.  The first round was allowed six months after the IPO went public.  The second round was one year later.

One week after the company went public, the shares went down to $19/share.   This was below what he sold the company at.   The company’s trading volume was very low.   We’re talking about 2,000 share/day if he was lucky.

By the time, he could sell his first round of stock, the shares had already dropped to $5/share. When we met three years later, the shares were at $3/share and he had not sold anything.   He was holding on to the stocks and hoping that it would come back to the price that he exchanged his company at.

The average, normal investor

What about you and me?   Well, unfortunately, here the adage of “the rich gets richer” holds true.   This is because buying IPOs is risky and the government has regulations in place to protect you from risk.

To buy an IPO, most brokerage firms enforce a suitability clause.   This means that your broker have to make sure that you are “qualified” as an “accredited investor in the eyes of the government for a risky investment.

This criteria is not in stone because it differs from firm to firm.   Here’s the breakdown of the SEC’s definition:

  • Someone who has net worth of over $1 Million but that net worth cannot include the value or equity of your home – primary residence.    Net worth is the amount of money/value you have after deducting your debts from the (asset) value of things that you own.   (Ladies, the expensive clothes and shoes that we indulge in don’t qualify as an asset.)
  • Someone with income over $200,000 in each of the most recent two years or joint income with a spouse that’s over $300,000.   You must also be able to maintain that income for future years.

I’ve seen some requirements of income over $250,000.

Now, let’s say that you meet all the criteria above.   Does this mean that you get automatic access to IPOs?   Ummm. I’m sorry to say but it’s a no.


All IPOs have a small portion that is shared with other brokerage firms who are not part of the syndicated deal.   This is done to build a wider market for that company’s stock and to seem equitable.   This is how a regular, normal investor may get access to an IPO.

Go to the SEC public filing and see who are all the companies that are involved in marketing that particular IPO.   Hoover or EDGAR are two good resources.

1.   Check with your brokerage or trading firm even if they’re not part of the syndicate.  They may have a small portion that is roll out by first-come, first-serve or by random lottery.   This will be completely dependent upon Lady Luck when the IPO is red hot.

2.   If your brokerage firm is part of the investment syndication that manages the IPO.   Here’s the ritual and reality of who gets the IPO.

Your personal broker deals IPOs as part of their business.   This means that your broker is committed to the firm for handling X amount of IPO business day in, day out and whether it smells good or bad.   That broker is helping the firm do its business so he/she gets part of the reward.

Selling IPO on a constant basis is not an easy job and the company understands that.   The broker does not have a choice on selling the IPO.   If they’re assigned 10,000 shares, they either sell the shares to interested customers or they eat it.   Their allotted time is literally minutes sometimes.   If they declined to take share in crappy IPOs, it will be held against the broker on future assignments of the good ones.

For hot IPOs, the broker has minutes to place it with customers.   If it’s not accounted by the deadline (usually 5 minutes), the shares go to someone else.

If the broker has never sold any IPOs before, chances are very low that they will get the hot ones UNLESS

*   Your broker is a star. Money talks.  If your broker is a BIG producer, a small portion will be given out to him/her upon request or lobbying.    If they’re producing $1 Million+ in revenue/year, the firm will bend over backwards to make them happy. The hotter the IPO, the more work that the broker needs to do and fight for that IPO piece with their peers.

*    You are a big individual customer with the firm – “A” client. Understand that this doesn’t mean lots of money sitting at the firm.  It means that you are a profitable, large fee paying customer.   Customers with big accounts that sits there without any activities or fees are actually a huge liability.

*    You are a hot prospect as a new customer for a firm.   If you’ve been chased nonstop by brokers, you can get the hot IPO in trade for moving your account over.  The regulators don’t allow that but some brokers don’t care.

*     You refer a lot of business to your broker. Smart business people appreciate and take care of their referral sources.   You may be a tiny account but if you’ve been an outspoken fan who brought business to the broker, you’re very important.   This depends on whether your broker has loyalty and is smart enough to take care of you.

NOTE:   As a private, retail investor, you need to understand that you can’t flip and take profits the first day if you’re participating in the IPO.  Typically, a firm puts a non binding restriction of 30 days before you should sell the IPO.   If you violate that and flip, don’t expect to ever get another IPO again.

Ask yourself this question:   Am I willing to take the risk and sit on this stock for 30 days? If not, don’t worry about the IPO pre market.  Buy it the same day on open market and trade as you like.

Yes, you won’t get the nice pop between IPO price and what market actually comes out at but you won’t own the risk of sitting on it for 30 days either.

What if none of the above options are available to you?

There’s always a way.    You can look at hedge funds (private investors) and mutual funds that were already invested in the company as a private equity purchase before the IPO is scheduled to go public.

Now you know most of the ways to get a hot IPO and can prepare for the next popular company that goes public.

What has been your experiences with IPOs?   Like them or hate them?   Share your knowledge with us so that other investors can avoid mistakes.
© 2012 MoneyandRisk.com all rights reserved

photo credit: By mmmmay lee


  1. Very informative post. Financial commitment financial institutions are promotion companies. It’s their job to take a organization community by promoting an picture to the making a excellent investment globe and develop a industry for the stocks. Not all of their IPOs are going to be excellent. Thanks for sharing.

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