Existing Disclosure Challenges of IPO Allocations: A Research Report

IPO allocations have been a topic of regulatory and legal attention. Prudent economics may explain the use of friends and family shares by private company owners going public, as well as underwriters' allotments of shares of initial public offerings (IPOs). However, systematic inquiry into potential abuses and conflicts of interest in preferential IPO allocations requires information on allocation practices. This paper explores whether existing disclosure within the regulatory infrastructure of Section 144 stock facilitated detection of the extent of use of friends and family shares. Likewise, newspaper accounts of allegations and lawsuits are used to explore whether the nature of conflicts of interest in allotments of IPO shares could be discerned using available public information. Our results suggest that these preferential allocations are not transparent ex ante nor are they discernible ex post. These disclosure challenges could be addressed through business practices and regulatory policy that build upon the potential power of information markets as envisioned in the full disclosure approach. However, political visibility, proprietary concerns, and the sensitivity of information regarding purchasers' privacy may combine to deter such practices.