Equity Crowdfunding / Facebook IPO

Preview to a piece written and being release.
Recently Interviewed about what Equity Crowdfunding would have done for the Facebook IPO.
The savings that equity crowdfunding would have brought to the deal are astonishing.

The recent Facebook initial public offering (IPO) saw the company
generate about $104 billion, but that doesn’t tell the
behind-the-scenes story.

Straight off the top, Facebook paid out $176,000,000 to the investment
banks which handled what is now being considered one of the most
botched IPOs in history. Morgan Stanley led the investment bankers and
has pocketed the biggest share of the $176m.

That’s 1.1 percent of the total value of the stock as it went public.
It does not reflect the now much-lower value of the stock.

A trio of reporters for Bloomberg’s online edition said the 1.1 percent is less than the investment
banks usually charge. Bloomberg reported 3.6 percent is the usual take
the investment banks get for handling an IPO. Facebook negotiated a
2/3s off deal because of the size of the IPO and the hype surrounding
it.

At the regular 3.6 percent, Facebook would have paid out nearly $400
million. That is a serious amount of money no matter how big a company
is. While that money may not as mean much to a company the size of
Facebook, 3.6 percent can represent the difference between success and
failure for small companies going public.

Fees can even be higher for smaller companies which are not expected
to generate such massive income. More fees to the investment banks
means less money goes back into the IPO company which is looking for
capital.

“That’s just not right,” said Howard Orloff, the “Mayor” of
IPO Village. IPO Village is a company that brings IPO offerings direct to the public without going
to through middlemen like investment banks. IPO Village does not
collect or charge underwriter fees, which means an IPO company gets to
keep far more of the money generated by the stock sale.

“Small companies go public because they are looking for a capital
boost to invest back in the company. The company owners have a vision
for the future and need backers to make that happen. They need all the
money they can get from their IPO,” Mr. Orloff said. “At IPO Village,
we believe the company should have a much more direct hand in how its
IPO goes through and the company should keep as much of the IPO income
as possible.”

A MARKET DRIVEN DEAL

An investment bank-driven IPO first sells stock to a pre-selected
group of investors, usually other banks and fund managers. They may
even get to buy the stock at a discount. These companies then sell the
stock to the public at a profit. By the time the public gets involved,
the stock has traded hand several times going up in price each time.

Add to this the IPO price is artificial. Using a complex series of
formulas, the investment bank determines the price of the stock. By
the time the open markets gets to have a say, the price could be just
about anything. In the case of Facebook, the stock was well
over-priced according to the public.

Unlike the traditional IPO as run through an investment bank, IPO
Village brings the stock direct to the public first.

“We let the public determine the value of the stock. If the public
thinks the stock is worth $10 a share, the IPO is $10 a share. Since
the stock will eventually wind up in the hands of the general public,
those should be the investors who determine the value of the company,”
Mr. Orloff said.

This open-market capitalism-driven IPO lets the company owners know
exactly what their business is worth, he added.

Going back to the Facebook IPO, the it appears the overpriced stock is
a direct result of Morgan Stanley either not understanding market
forces or the bank’s operators simply ignored market forces in pursuit
of more profit for themselves at the expense of public investors.
Given Morgan Stanley’s profit margins and decades of success in the
financial markets, it’s hard to believe the bankers did not fully
understand the Facebook business model.

“When a company takes its stock direct to the public, they cut out a
middleman who is only interested in himself. The company can present
its case direct to the public and get a fair deal for its stock. The
company has to be considered on its own merits,” Mr. Orloff said.
“Investors can make their own decision based on company information
that has not been manipulated by investment banks that are guaranteed
a profit no matter what happens.”

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