OpenIPO

OpenIPO is a modified Dutch auction which allows shares of an initial public offering (IPO) to be allocated in an impartial way. It is a variation on the traditional way that shares are sold during the IPO process and results in all successful bidders paying the same price per share.^[1]

Based on an auction system designed by the economist William Vickrey, the OpenIPO auction uses a mathematical model to treat all qualifying bids in an impartial way. It is similar to the model used to auction Treasury bills, notes, and bonds. Just like in a typical auction, the highest bidders win in an OpenIPO auction, but there are important differences. In the OpenIPO auction, the entire auction is private, and winning bidders all pay the same price per share—the public offering price.

WR Hambrecht + Co has used OpenIPO to take a number of companies public including Morningstar, Interactive Brokers Group, Overstock.com, Ravenswood Winery, Clean Energy Fuels, Boston Beer Company, and, most notably, functioned as co-manager to take Google public in 2004, using the Dutch auction system. Many traditional investment banks have balked at the idea of using an auction process, such as OpenIPO to engage in public securities offerings as this new method allows for equal access to the allocation of shares and eliminates the “behind the scenes” dealings of shares and favorable treatment often found in conventional IPOs. Despite other banks’ resistance to using this method, however, OpenIPO has been used for over 20 public offerings.

Financial historians Richard Sylla and Robert E. Wright have shown that before the Civil War most early U.S. corporations sold shares in themselves directly to the public without the aid of intermediaries like investment banks.^[2] The direct public offering or DPO, as they term it,^[3] was not done by auction but rather at a share price set by the issuing corporation. The DPO eliminated the agency problem associated with offerings intermediated by investment banks but was not as effective at price discovery.

References

1. "E-commerce and the undulating distribution channel". portal.acm.org. Retrieved 2008-05-13.
2. Robert E. Wright, “Reforming the U.S. IPO Market: Lessons from History and Theory,” Accounting, Business, and Financial History (November 2002), 419-437.
3. Robert E. Wright and Richard Sylla, "Corporate Governance and Stockholder/Stakeholder Activism in the United States, 1790-1860: New Data and Perspectives.” In Jonathan Koppell ed., Origins of Shareholder Advocacy (New York: Palgrave McMillan, 2011), 231-51.