Gemini Allocates 30% of IPO Shares to Retail Investors, Aiming for 15% Price Increase

The U.S. initial public offering (IPO) market is experiencing a notable shift, with companies allocating larger portions of their shares to retail investors. This trend aims to maximize fundraising efforts and mitigate the risk of dramatic price surges on the first day of trading.

Gemini, a prominent cryptocurrency exchange, has set a new benchmark by reserving nearly 30% of its IPO shares for retail investors. This allocation is a substantial increase from the traditional 6% allocation, and it is part of a broader trend where companies are rethinking their IPO strategies to better engage with individual investors. Klarna, another company that recently went public, allocated over 10% of its shares to retail investors, further emphasizing this new trend.

The rationale behind this strategy is multifaceted. By allocating a larger portion of shares to retail investors, companies can tap into a broader investor base, which can lead to more stable and predictable demand. This approach also helps in managing the initial price volatility, as retail investors are less likely to engage in aggressive trading compared to institutional investors. The goal is to keep the first-day price increase within a reasonable range, ideally around 15%, rather than experiencing the dramatic spikes that have become common in recent years.

This shift in IPO strategy is not just about maximizing fundraising efforts; it is also about creating a more inclusive and stable market environment. By giving retail investors a larger stake in the IPO process, companies can foster a sense of ownership and engagement among individual investors. This, in turn, can lead to more sustainable long-term growth and a healthier market ecosystem.

The recent IPO of Gemini is a prime example of this new trend. The company priced its shares at $28 each, exceeding the initial expectations of $24 to $26 per share. This pricing strategy, combined with the significant allocation to retail investors, allowed Gemini to raise $425 million through its IPO. The company initially planned to issue 16.67 million shares but reduced this number to 15.2 million shares to meet the new pricing and allocation goals.

This trend is driven by the realization that dramatic first-day price surges can be detrimental to both the company and early investors. For instance, Circle and Figma, which experienced significant first-day price increases, missed out on substantial potential revenue. Figma, in particular, lost approximately 300 million dollars due to its IPO pricing strategy.

In response to these issues, underwriters are now focusing on controlling the first-day price increase to around 15%, a level that reflects market demand without undervaluing the company. This approach helps in maintaining a balanced investor base, as companies often carefully select institutional investors who are likely to hold their shares for the long term.

However, if the stock price surges dramatically in the initial weeks, these institutional investors may choose to sell their shares for profit, undermining the carefully curated investor structure. In contrast, retail investors tend to hold their shares for longer periods, contributing to price stability.

This shift in IPO strategy is also influenced by the changing market environment. The CEO of Robinhood Markets has long advocated for giving retail investors a larger share in public offerings. When the company went public in 2021, it reserved a quarter of its shares for retail investors, a move that was initially met with skepticism but has since gained acceptance.

This trend is expected to continue as more companies recognize the benefits of engaging with retail investors. By doing so, they can create a more stable and inclusive market environment, ultimately benefiting both issuers and retail investors.