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  • What Equity Crowdfunding Could Have Done For The FaceBook IPO 0 comments
    Sep 23, 2012 10:25 PM | about stocks: FB

    about:FB

    The recent Facebook initial public offering (NYSEARCA: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."

    For more information on Equity Crowdfunding visit Crowdfunding Website Reviews or go directly to IPO Village.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    This article is tagged with: IPO Analysis

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Founder of Crowdfunding-website-reviews.com and "Mayor" of IPOvillage.com

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