Democratize the IPO process

The lessons of the Facebook IPO are many, but one of them is not that small investors should shy away from initial public offerings. The IPO process has always been a highly regulated insiders’ game favoring institutions and wealthy investors. The process is a function of regulations and technology from the presocial-media era.

It is a misnomer to say small investors had an opportunity to invest in the Facebook IPO. One leading broker’s eligibility requirements were “reserved for brokerage customers with a minimum of $500,000 in certain assets held.” These aren’t the 99%; they’re the 1%, and that isn’t putting the “public” into IPOs.

A further postmortem of the Facebook IPO, its sizing, pricing and the unfortunate Nasdaq glitch is much less instructive than a discussion of what structural changes are needed.

New social technologies, plus the ubiquity of the Facebook platform, can transform IPOs, creating a fair and democratized IPO process. (How ironic is that?) Wall Street meets Silicon Valley, putting Main Street investors back in the game. A social media and Web platform with core principles of transparency, equal access and a level playing field.

No doubt Wall Street and institutional investors play the central role in capital formation, especially with IPOs. But, the game-changer is to empower Main Street, adding material new liquidity, and a balancing voice to the process. Don’t you think IPOs would be priced more fairly if an issuer’s consumers represented a portion of the initial shareholders?

Today, 82% of American families are not directly investing in companies, and only 13% have participated in an IPO. Imagine if 20 million Facebook users could invest $200 each in its IPO; that’s $4 billion, or 25% of the entire valuation, from supportive investors, not short sellers. Could anyone argue that this is not a better way?

The lessons of Facebook are clear. IPOs require more transparency and equal access to information and participation. The small investors are not the problem with IPOs; they are the solution.

Barry Schneider is CEO of LOYAL3, a company that offers a Web and social media platform for fractional shares and IPOs.