In a bid to maneuver around the underwriters, the big investment banking firms that traditionally control IPO prices, OpenIPO will try to balance the interests of the companies going public with those of the investors. Share prices and allocations will be determined by an impartial, Internet-based auction system, according to Hambrecht.
"We developed OpenIPO to take advantage of new technologies for the distribution of equity securities to their most natural buyers," said W.R. Hambrecht CEO Bill Hambrecht.
This system is nearly the opposite of what Bill Hambrecht practiced over the past 30 years at Hambrecht & Quist, where IPO shares were mostly divided up amongst the firm's top institutional investors and clients.
The OpenIPO system is based on a design by Nobel-prize-winning economist William Vickrey, and uses a mathematical model that lets the market set the optimal share price for both the company and the investors. A similar model is used by the U.S. Treasury to auction 10-year notes and 30-year bonds.
Under the OpenIPO process, every bid--individual or institutional--is on equal footing. The OpenIPO auction permits potential buyers--through bidding--to create a market-clearing price, which is the price at which the company can sell all the shares it is offering.
The bidders that offer a price above the lowest accepted bid then receive the option to buy the number of shares they bid for at a price equal to that market clearing price. Because every successful bidder pays the same price as the lowest accepted bid, many investors may ultimately pay less than they bid for the stock.
"By bringing together buyers and sellers in a blind auction, OpenIPO allows the market to determine the full and fair market value of an offering," said Ian Zwicker, president of W.R. Hambrecht. "The result of the OpenIPO process is an initial price that reflects what people are willing to pay for a stock, not the discounted best estimate of an analyst."
The company also hopes that by leveraging technology, the high costs of an IPO will fall for the issuing company as underwriting commissions, printing, legal, and out-of-pocket costs drop. Hambrecht said that OpenIPO will allow the economics of the issuing company to drive the deal size, not the cost structure of the underwriting investment bank.
Each company that goes public through OpenIPO will receive continuing coverage by Hambrecht's online research product--along with hundreds of other publicly traded companies the product tracks.
Companies are categorized based upon product offerings, competitive groupings, and the market trends exploited. Complete financials, competitive analysis, valuation comparables, and market studies will be outsourced to independent third-party research firms. Hambrecht hopes this will give a unified and unbiased view of the investment risks and opportunities facing a particular company.