Article by Royce de R. Barondes
Over $40 billion were raised in initial public offerings (IPOs) during 1998. Stock sold in an IPO, on average, quickly trades significantly above its initial offering price, providing quick gains to the initial purchasers. Investment banks that underwrite IPOs are taking a number of actions to discourage purchasers of stock in IPOs from quickly reselling their stock, called “flipping.” Some underwriters have refused to permit those who flip stock purchased in an IPO to purchase in subsequent IPOs. These penalties for flipping, however, are imposed selectively, with favored customers not punished (or punished less severely), and with different brokerage firms requiring differing holding periods to avoid the adverse consequences. This Article examines the implications of this practice under the disclosure obligations imposed by federal securities laws and concludes that the current disclosure is materially misleading, particularly in light of the failure to disclose the selective application of the penalties. Moreover, the selective application of the penalties casts significant doubt on whether these offerings can be considered “fixed price” offerings, which would mean that cursory disclosure of the practice would not suffice.
About the Author
Royce de R. Barondes. Assistant Professor, E.J. Ourso College of Business, Louisiana State University. J.D. University of Virginia; S.M., S.B. Massachusetts Institute of Technology.
Citation
74 Tul. L. Rev. 883 (2000)