Companies limited in offering IPO promotions, discounts
— -- Q: Are companies like Facebook and brokers allowed to advertise their stock, or offer promotions, to get investors to buy it?
A: Hope you're not expecting to see a "buy one Facebook share, get another free" deal anytime soon.
You raise a valid point. There's no question shares of new companies are clearly financial merchandise that must be sold. When there's an initial public offering of a company investors aren't hot on, such as a money-losing firm, sometimes investment bankers have to work extra hard to move the shares.
But discounting on Wall Street doesn't work the same way as it does on Fifth Avenue.
When investment bankers have an IPO that is a tough sell, they don't offer 'buy one, get one free' offers or coupons. Instead, they use the ultimate sales lever: the offering price. When underwriters and companies are eager to get their IPOs out the gate, they simply cut the price they sell the shares to the initial investors at. This, in effect, is a discount to encourage buyers.
Going back to Facebook, the popular social-networking site, such discounting to the shares likely won't be necessary. There's a line around the block of investors who would like to buy shares. If anything, when the price is set on Facebook, investment bankers will have the ability to raise the initial price and require investors to pay up for the shares.
You bring up another interesting point: the concept of promoting an IPO. The rules around how a company may promote itself to investors while selling shares for the first time are very strict. Companies are first required to put all the relevant information about their IPO, in gory detail, in a regulatory filing called the prospectus.
The prospectus must be a sober look at the business' performance as well as its risks. There's an entire section dedicated to risks that's required to disclose just about every possible wart on the deal.
As regulators inspect the prospectus and the company nears its IPO pricing day, the rules about advertising are strict. Companies are to not promote their shares during the time. Companies may talk to investors, in fact they do so during road shows. They can even speak with the press. But when talking to investors or the media, companies must be careful to not go as far as to encourage investors to buy the stock. Companies are supposed to present company information in a factual way, and not get too boosterish. Yes, it's a fine line.
But again, Facebook has no shortage of hype and boosters and is unlikely to use any promotional activity. If anything, the company and its underwriters will have to discourage investors, not lure them in.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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