By Jorge Sanchez, Crowdfund Beat Guest Editor,
The Initial Public Offering(IPO) has long been one of the most honored and revered business milestones. For entrepreneurs, early employees and investors IPOs are seen as the ideal liquidation event. But it is also seen by many as more, the IPO represents the ultimate validation of a business: a metamorphosis of a private company into one subjected to the democracy of the public equity market.
As monumental as an IPO is, both for the company and members of the public which support the business, investing in an IPO is anything but public or democratic.
ClickIPO Securities, a FINRA registered broker dealer, is a financial technology startup that is changing the way underwriters allocate shares in public offerings by inviting individual investors into the IPO market with an easy to use app and creating the infrastructure to facilitate the process from the underwriter to the investor.
Based in Scottsdale, Arizona, Click IPO Securities is led by finance leaders Scott Coyle and James Farrelly, while development efforts are lead by tech startup veterans Jerrod Bailey and Vann Gutierrez.
To bring individual investors back into the IPO market, ClickIPO has created a technology pipeline that connects the underwriting investment bank to the retail investor. Underwriters are provided with a dashboard that makes the process transparent. The turnkey platform provides syndicate managers a single point of contact through which they can allocate shares through dozens of broker-dealers to thousands of investors with one simple allocation. A broker-dealer dashboard complete with compliance and regulatory automation technology allows online brokerage firms to integrate their clients into the IPO pipeline. To give retail investors access to IPOs and secondary offerings, ClickIPO has created a mobile app with a scoring system that minimizes the risk to issuers and underwriters of IPO flipping. The app allows a user to research available IPO and secondary offerings, choose a company they like, and place an order, all through the app. Once the shares are purchased, they will be placed in the customer’s existing brokerage account.
The significant account minimums at large investment banks that underwrite public offerings have limited the investment in IPOs to institutional investors and the wealthy. The only way for an individual investor to gain access to an IPO is through a broker-dealer or a relationship with the investment bank underwriting the offering, this route is limited, based on connections, and suffers from difficulties that arise due to compliance and technology issues.
There is also another risk inhibiting the entry of individual investors into the IPO market; All too often when a syndicate manager allocates shares of an IPO, some of those shares end up in the hands of an IPO flipper disguised as an individual investor. A flipper is someone who through a broker-dealer is allocated shares of an IPO and quickly sells them (any time in the first 30 days is considered flipping) once the shares start trading on an exchange. With the intent to sell early regardless of the price, the IPO flipper creates downward pressure on the share price. The IPO flipper does not add any value in this process but instead diminishes value for everyone else. Once a syndicate manager allocates the shares of an IPO, they don’t have an effective way to track which investors held shares and which investors flipped(sold) shares . They can only minimize flipper risk by limiting IPO flippers from getting shares in the first place, which has proven to be difficult in the current model for syndicate managers.
The team at ClickIPO has developed a solution to mitigate the risk of IPO flipping. At one end of the ClickIPO pipeline is a mobile app that is incredibly frictionless: the ClickIPO app is connected directly to an investor’s existing brokerage account. This mobile app may likely partner with every major brokerage firm and create a pure network of buy-and-hold IPO and secondary offering investors.
At the core of the mobile app is the ClickIPO Investor Score. Something akin to a credit score for IPO and secondary offering investors, the ClickIPO Investor Score takes into account the investor’s behavior and generates a metric representative of the desirability of that investor to an underwriting firm. The allocation algorithm awards priority to those on the platform who have proven they do not engage in IPO flipping behavior through the development of an attractive ClickIPO Investor Score. While the proprietary algorithm takes into account many factors that make an investor desirable to an underwriting firm, the most highly weighted factor is the average duration that an investor holds shares. Holding shares for more than 30 days will reward the investor with a higher score, the longer an investor holds his shares, the more significant the positive impact will be; Those that exit their position prior to the 30 day mark will receive a negative impact on their score, however, if the price of the offering has a significant increase, the negative impact of selling shares in the first 30 days will be less.
ClickIPO also provides value for broker-dealers offering their customers access to IPOs. The burden and risk associated with regulatory and compliance issues has diminished the broker-dealer benefits of offering IPOs to investors until now. The ClickIPO broker-dealer dashboard comes complete with regulation and compliance automation technology, allowing the broker-dealer to provide access to IPOs to their customers while mitigating the risks associated with regulation and compliance. There is also a monetary incentive for broker-dealers to join the network; When ClickIPO places shares into the accounts of broker-dealers, they receive a commission from the underwriter. ClickIPO allots a portion of this commission to the broker-dealer, often making it a more profitable transaction for the broker-dealer than a traditional marketplace transaction.
The deal flow provided by underwriters (major investment banks) is critical to the ClickIPO business model, ClickIPO has developed a powerfully simple process on top of a sophisticated technology infrastructure to assist underwriters. Where the ClickIPO Investor Score eliminates most of the risk of IPO flippers to an underwriter, ClickIPO delivers additional value with an automated, compliant, and secure process with their syndicate manager platform. Because ClickIPO aggregates thousands of investors onto a single platform, syndicate managers will have a single interface through which they can allocate millions of shares efficiently to these individual investors. After determining how many shares will be allocated to ClickIPO Securities, the ClickIPO allocation algorithm automatically distributes the shares throughout the broker-dealer network and directly into the accounts of the end users based on their priority set by the ClickIPO Investor Score. Additionally, the ClickIPO pipeline generates a great deal of data that is not available today. These data points are presented on the platform and give underwriters insight into the behavior of investors.
The waitlist for the app is live and can be found on ClickIPO’s website where interested investors can sign up to access IPOs and secondary offerings when the app goes live during the second quarter of 2017.
ClickIPO has integrated a series of complementary tools that allows individual investors to access IPOs. With such a deeply integrated and efficient distribution system, it seems ClickIPO may have an infrastructure capable of conducting all non-institutional IPO allocations for any offering and any underwriter. Non-institutional allocations represent approximately 20% of most offerings. I spoke with Scott Coyle, CEO of Click IPO Securities and asked about the ambitions of the company, he said, “we intend to become the premiere retail aggregation pipe by providing access to hundreds of IPO and Secondary offerings every year, to millions of individual investors”.