Gemini up to 30%! New trend of US stock IPOs: provide retail investors with sufficient "new share" quota, maximize financing scale, and avoid soaring on the first day

The U.S. IPO market is undergoing a quiet transformation. More and more companies are beginning to allocate a larger proportion of IPO shares to retail investors to stabilize stock price fluctuations and maximize fundraising effectiveness.

On September 12, according to The Wall Street Journal, the cryptocurrency platform Gemini Space Station, which went public on Friday (September 12), reserved nearly 30% of its IPO shares for retail investors, far exceeding the traditional 6% allocation. The stock rose 14% on its first day to $32, giving the company a market capitalization of approximately $3.8 billion.

The "European Huabei," buy now pay later company Klarna, also allocated over 10% of its shares to retail investors during its listing on Wednesday, with the first-day increase controlled at around 15%, in line with the underwriters' target range, giving the company a valuation of approximately $16 billion.

Analysts point out that this trend reflects a rethinking of IPO pricing strategies. Several large IPOs this year have seen explosive first-day gains, which, while seemingly positive, actually mean that companies and early investors missed out on billions of dollars in fundraising opportunities. Wall Street bankers are trying to alleviate this issue by increasing the allocation to retail investors.

Significant Increase in Retail Allocation

In traditional IPOs, institutional investors typically receive the vast majority of stock allocations, with retail investors only getting about 6%. However, several important IPOs this week have significantly exceeded this ratio.

Gemini plans to allocate up to 30% of its IPO shares to retail investors, setting a recent high. Klarna sold over 10% of its shares to retail investors during its listing on Wednesday.

The cryptocurrency exchange Bullish also allocated 20% of its shares to retail investors when it went public last month. Although the stock still rose 84% on its first day, insiders believe that a large allocation to retail investors helps avoid a more significant first-day surge.

Curbing First-Day Surges Becomes a Key Goal

Underwriters' concerns about excessive first-day gains for new stocks began with several typical cases this summer. In June, stablecoin issuer Circle Internet Group saw its stock price double on the first day, while in July, design software company Figma surged by 250%.

The case of Figma is particularly noteworthy, as the company and its shareholders missed out on approximately $3 billion in potential earnings due to low IPO pricing. Such first-day surges not only mean that the issuer failed to fully capitalize on market demand but can also disrupt the carefully constructed investor structure of the company.

Many industry insiders attribute this excessive surge to a large influx of price-insensitive retail investors. Therefore, allowing more retail participation from the IPO stage has become a new solution. Underwriters typically hope to control the IPO's first-day increase at a reasonable level of around 15%, which reflects market recognition without harming the interests of the issuer due to underpricing.

Reports indicate that the surge on the first day of the IPO may disrupt the carefully planned investor base for the IPO. Company executives usually select large institutional investors with care, prioritizing fund management companies like Fidelity or T. Rowe Price that tend to hold shares for the long term.

If the stock doubles or triples in value within a few weeks after listing, these funds may choose to take profits, rendering the careful investor selection meaningless.

In contrast, retail investors are more inclined to hold stocks for the long term, which is another reason why increasing the allocation for retail investors helps reduce early price volatility.

Changes in Market Environment Drive Trend Formation

This trend has emerged due to changes in the IPO market environment. Vlad Tenev, CEO of Robinhood Markets, has long advocated for retail investors to gain a larger share in public offerings.

When the company went public in 2021, it reserved a quarter of the shares for retail investors. Tenev stated that Wall Street was skeptical at the time, but the situation has now changed.

Tenev stated in an interview that the company now "understands that having a large and active retail shareholder base is beneficial for the business."

This week, Robinhood customers can apply to purchase shares of companies including Klarna, Circle, and StubHub, which will begin trading next week.

It is worth noting that since their IPOs, the stock prices of Bullish, Circle, and Figma have all fallen from their early highs, further confirming the market rule that first-day surges are often difficult to sustain