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*[[All-or-none contract]]
*[[Bought deal]]
Public offerings are sold to both institutional investors and retail clients of the underwriters. A licensed securities salesperson ([[Registered Representative]] in the US and
The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under a specific circumstance known as the [[greenshoe]] or overallotment option. This option is always exercised when the offering is considered a "hot" issue, by virtue of being oversubscribed.
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Historically, many IPOs have been underpriced. The effect of underpricing an IPO is to generate additional interest in the stock and a rapid rise in share price when it first becomes publicly traded (known as an "IPO pop"). [[Flipping]], or quickly selling shares for a [[Profit (accounting)|profit]], can lead to significant gains for investors who were allocated shares of the IPO at the offering price. However, underpricing an IPO results in lost potential capital for the issuer. One extreme example is [[theglobe.com]] IPO which helped fuel the IPO "mania" of the late 1990s internet era. Underwritten by [[Bear Stearns]] on 13 November 1998, the IPO was priced at $9 per share. The share price quickly increased 1,000% on the opening day of trading, to a high of $97. Selling pressure from institutional flipping eventually drove the stock back down, and it closed the day at $63. Although the company did raise about $30 million from the offering, it is estimated that with the level of demand for the offering and the volume of trading that took place they might have left upwards of $200 million on the table.
The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of trading. If so, the stock may lose its marketability and hence even more of its value. This could result in losses for investors, many of whom being the most favored clients of the underwriters. Perhaps the best-known example of this is the Facebook
Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock but high enough to raise an adequate amount of capital for the company. When pricing an IPO, underwriters use a variety of key performance indicators and non-GAAP measures.<ref>{{cite journal|last1=Gould|first1=Michael|title=How Non-GAAP Measures Can Impact Your IPO|url=https://www.transactionadvisors.com/insights/how-non-gaap-measures-can-impact-your-ipo|journal=Transaction Advisors|issn=2329-9134|access-date=16 January 2015|archive-date=6 November 2018|archive-url=https://web.archive.org/web/20181106192726/https://www.transactionadvisors.com/insights/how-non-gaap-measures-can-impact-your-ipo|url-status=dead}}</ref> The process of determining an optimal price usually involves the [[underwriters]] ("syndicate") arranging share purchase commitments from leading institutional investors.
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