How to Buy IPO Shares as a Retail Investor

An Initial Public Offering (IPO) represents the moment a private company first offers its shares to the public, transitioning into a publicly traded entity. This process allows companies to raise significant capital from a wide pool of investors, which can be used for growth, debt repayment, or other initiatives. For individual investors, an IPO presents a unique opportunity to acquire ownership in a company at an early public stage, potentially participating in its future growth. Understanding the mechanisms of an IPO is beneficial for those considering such an investment.

Retail Investor Access to IPOs

Accessing IPO shares at their initial offering price can be challenging for individual investors compared to large institutional counterparts. The Securities and Exchange Commission (SEC) does not regulate the specific business decisions of how IPO shares are allocated, giving underwriters broad discretion in their distribution. Historically, most IPO shares are primarily reserved for institutional investors, such as mutual funds and pension plans, or wealthy clients. These entities are perceived as stable, long-term shareholders and can purchase larger blocks of shares. This means a significant portion, often around 90%, goes to institutional demand, leaving a smaller percentage for retail investors.

When an IPO generates substantial interest, often termed a “hot IPO,” demand for shares far exceeds the available supply, making it more difficult for individual investors to secure an allocation. Underwriters frequently prioritize their most valued clients for these high-demand offerings. While some shares are set aside for retail investors, securing them often depends on specific conditions and the investor’s relationship with a brokerage firm.

Participation Channels for Retail Investors

Despite the general challenges, retail investors can gain access to IPO shares through various channels. Many traditional and online brokerage firms receive allocations from the underwriting syndicate and may offer these shares to their eligible clients. Eligibility criteria vary by firm, often including requirements such as a minimum account size, ranging from $100,000 to $500,000 in household assets, or being a premium client. Some brokers might also consider trading history or the overall revenue an investor generates for the firm.

Beyond traditional brokerages, emerging direct-to-consumer platforms broaden retail investor access to IPOs. These platforms facilitate participation directly from companies or through alternative offering structures, such as Regulation A+ offerings. Firms like TradingBlock, SoFi Invest, Webull, and Robinhood have developed platforms to provide their customers with access to new offerings, sometimes integrating IPO access directly into their apps. These platforms aim to simplify the process and reduce paperwork, allowing investors to participate through standard brokerage or retirement accounts like IRAs.

Essential Information Before Investing

Before considering an investment in an IPO, gathering and understanding specific information about the company and the offering is important. The primary source for this information is the prospectus, a legal document filed with regulators that provides comprehensive details about the company. Investors should carefully review the prospectus, which is publicly available, to assess the company’s potential and associated risks.

Key sections within the prospectus include a business overview detailing the company’s model, products, services, and growth strategies. The financial statements, including balance sheets, income statements, and cash flow statements, offer insights into the company’s historical performance and financial health, often including auditor reports. The prospectus also outlines potential risk factors that could affect the company’s operations or financial performance, such as market risks or regulatory challenges. The document also describes how the company intends to use the proceeds from the IPO, which could range from funding expansion to debt repayment.

The Process of Buying IPO Shares

Once an investor has selected a participation channel and completed their due diligence, the process of acquiring IPO shares begins. Investors express their interest in an upcoming IPO by submitting an “indication of interest” (IOI) through their brokerage firm. This IOI is a conditional, non-binding expression of interest in purchasing a specific number of shares, often with a minimum requirement, such as 100 shares, and may require a certain cash balance in the account. Submitting an IOI does not guarantee an allocation, as demand may exceed supply.

After the company’s registration statement is declared effective by the SEC and the final IPO price is determined, usually on the evening before public trading begins, investors who submitted an IOI will receive a notification to confirm their interest. This confirmation transforms the non-binding IOI into a conditional order to buy shares at the determined price. Share allocation occurs on the morning following pricing, with shares being credited to successful applicants’ brokerage accounts, typically within one business day (T+1 settlement). Unallotted funds are returned to the investor’s account.