Accounting Best Practices, Fifth Edition

11–10. Sell Shares in an Internet-Based Auction[1] [1] Reprinted with permission from Chapter 16 of Steven M. Bragg, The New CFO Leadership Manual (Wiley, 2003).

Any initial public offering (IPO) is an exceedingly expensive process, due to the massive accounting, legal, and underwriting fees involved. In addition to these expenses, it is entirely possible that the initial stock issuance will be somewhat underpriced, because the underwriters have usually committed to purchase the entire stock issuance from the company, and so want to flip their investment over to investors as soon as possible. There is also some suspicion that they are pricing an issuance low in order to sell shares to parties to whom they owe favors. Whatever the case may be, the traditional IPO share sale tends to result in low prices, which takes cash away from the company and forces it to issue more shares in order to reach its cash target, thereby ceding more share voting control to outside entities.

An alternative to the traditional sale of stock through an underwriter is to use an “OpenIPO” auction. Under this approach, potential investors download a prospectus over the Internet from an underwriter that specializes in this type of offering. If they wish to bid on the shares, they open an account with the underwriter, select a bid price and the number of shares desired, and send the underwriter a check for that ...