Do not get excited; if you ever get such type of an offer as it should sound warning bells to you.
We will take an example of Twitter IPO where stock soared from its $26 IPO price to $44.90, a sweet profit for investors who were able to take advantage. The pre-IPO ownership group generally consists of a collection of founders and individual investors who wish to sell a portion of their stake in the firm.
In effect, party A (the pre-IPO owners) are selling to party B (the public).
This is where the conflict sets in.
In between party A and party B is a well-compensated collection of investment bankers, who take a cut out of whatever proceeds party A receives from party B.
In the case of Twitter, this middle man(Goldman Sachs in this case), raked in a tidy $59.2 million.
Naturally, the more interest the middle man can drum up, the more the company sells, the more the middle man makes… an obvious chain of conflict.
Which, of course, means the last person the middle man is looking out for is YOU.
It's the job of the middle man to make it appear to buyers that they are getting a great deal, using fancy presentations, lavish dinners, and making the company's financial past look far rosier than it actually is.
Thus, the risk of making a bundle is much greater than appears on first glance.
In fact, for every good IPO that is offered, the overwhelming majority are bad ones. Thus, if you are ever offered the opportunity to participate in an IPO, get your guard up. In all likelihood, there's a very good chance that institutional and other investors have taken a pass. Thus first thing which you need to check is that has any other institutional investor has subscribed to their offer as FIIs are like a rat i.e. first to get in the ship and first to leave a sinking ship.
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