1 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/CE, 2017, L168/12 (Prospectus Regulation).
2 Regulation (EU) 565/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directive 2003/124/EC, 2003/125, and 2004/72/EC, 2014, OJ L173/1. For a first commentary of the MAR, see Marco Ventoruzzo and Sebastian Mock (eds), Market Abuse Regulation (Oxford: OUP, 2017).
3 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), 2003, L96/16. On the MAD, see Guido A. Ferrarini, ‘The European Market Abuse Directive’, Common Market Law Review (2004) 41, 711.
4 In the previous regulatory regime, the two exemptions were regulated in detail by Commission Regulation (EC) 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilization of financial instruments, 2003, L336/33. For buy-back programmes, see Mathias M. Siems and Amedeo De Cesari, ‘The Law and Finance of Share Repurchases in Europe’, Journal of Corporate Law Studies (2012) 12, 33; for stabilization activity in IPOs, see Stefano Lombardo, ‘The Stabilisation of the Share Price of IPOs in the United States and the European Union’, European Business Organization Law Review (2007) 8, 521; Dmitri Boreiko and Stefano Lombardo, ‘Stabilisation Activity in Italian IPOs’, European Business Organization Law Review (2011) 12, 437; Stefano Lombardo, Quotazione in borsa e stabilizzazione del prezzo delle azioni (Milano: Giuffrè, 2011).
5 In this chapter, the words ‘stabilization’ and ‘stabilisation’ have the same meaning and are considered the same.
6 Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016 supplementing Regulation (EU) 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilization measures, 2016, L173/34. On stabilization (and buy-back programmes) in the new regulatory regime of MAR, see for a first introduction, Sebastian Mock, ‘Exemptions for Buy-Back Programmes and Stabilization’, in: Ventoruzzo and Mock (n. 2), 154–68.
7 See Alexander P. Ljungqvist, Tim Jenkinson, and William J. Wilhelm Jr, ‘Global Integration in Primary Equity Markets: The Role of US Banks and US Investors’, Review of Financial Studies (2003) 16, 63. The literature on the economics of IPOs is extensive, with studies covering both theoretical and empirical topics for many countries. For general introductions, see Jason Draho, The IPO Decision: Why and How Companies Go Public (Cheltenham: Edward Elgar, 2004); Tim Jenkinson and Alexander P. Ljungqvist, Going Public: The Theory and Evidence on How Companies Raise Equity Finance (Oxford: OUP, 2001); Jay R. Ritter and Ivo Welch, ‘A Review of IPO Activity, Pricing and Allocations’, Journal of Finance (2002) 57, 1795; Jay R. Ritter, ‘Differences between European and American IPO Markets’, European Financial Management (2003) 9, 421. With respect to European IPOs, see the contributions in Mario Levis and Silvio Vismara (eds), Handbook of Research on IPOs (Cheltenham: Edward Elgar, 2015).
8 Reinier H. Kraakman, ‘Gatekeepers: The Anatomy of a Third-Party Enforcement Stategy’, Journal of Law, Economics, and Organization (1986) 2, 53; Ronald J. Gilson and Reinier H. Kraakman, ‘The Mechanism of Market Efficiency’, Virginia Law Review (1984) 70, 549, 613.
9 For the US, the relational choice is analysed by Chitru S. Fernando, Vladimir A. Gatchev, and Paul A. Spindt, ‘Two-Sided Matching: How Corporate Issuers and their Underwriters Choose Each Other’, Journal of Applied Corporate Finance (2013) 25, 103.
10 It is also possible to have combinations of the three. See Samuel N. Allen, ‘A Lawyer’s Guide to the Operation of Underwriting Syndicates’, New England Law Review (1991) 26, 320. On the structure of compensation, see for the US, where fees converge to 7 per cent of the value of the offering, Husuan-Chi Chen and Jay R. Ritter, ‘The Seven Percent Solution’, Journal of Finance (2000) 55, 1105; for the lower level of European fees, see Sami Torstila, ‘What Determines IPO Gross Spread in Europe?’, European Financial Management (2001) 7, 523; Mark Abrahamson, Tim Jenkinson, and Howard Jones, ‘Why Don’t US Issuers Demand European Fees for IPOs?’, Journal of Finance (2011) 56, 2055.
11 There can be a discount (of e.g. 5 per cent) for some investors (e.g. customers or employees of the company) on the basis of equal treatment rules, but always based on the single offering price.
12 This fact is typically not studied by economists, who consider it as given and normal. For the US, see Sean J. Griffith, ‘The Puzzling Persistence of the Fixed Price Offering: Implicit Price Discrimination in Ipos’, in University of Connecticut School of Law Working Paper Series, 2005, also at disposal on http://www.ssrn.com. For the European Union, Article 8, Prospectus Directive 2003/71/EC and now Article 17, Prospectus Regulation refer to the final offer price (singular), as do other rules (see e.g. Art. 5.1(b) Regulation 2016/1052 referring to the final price (singular)). The continuous reference of EU legislation to an offering final price (singular) maybe proves the impossibility of setting different prices for different investors, and is a situation that can be evaluated by everyone in the European and national context.
13 Theoretically, following the so-called ‘Law of One Price’, one could argue that the single price is the result provided by the market to anticipate possible arbitrage mechanisms between the two different prices that would in any case reach a single price. On the Law of One Price in financial markets, see Owen A. Lamont and Richard H. Thaler, ‘The Law of One Price in Financial Markets’, Journal of Economic Perspectives (2003) 17, 191.
14 On underpricing, see the excellent introduction by Alexander P. Ljungqvist, ‘IPO Underpricing’, in: B. Espen Ebcko (ed.), Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 1 (Amsterdam: Elsevier, 2007), 375. For underpricing in an alternative market, see Miguel À. Acedo-Ramírez and Francisco J. Ruiz-Cabestre, ‘IPO Characteristics and Underpricing in the Alternative Investment Market’, Applied Economic Letters (2017) 24, 485. The long-run underperformance of IPO shares means that on average their return underperforms the market return for a period of three to five years after the IPO, see Ljungqvist, ‘IPO Underpricing’, 385.
15 For example, the price switches from €10 (the offering IPO price) to €11 with an underpricing of 10 per cent.
16 Statistical data for an international comparison among several countries is provided by Timothy Loughran, Jay R. Ritter, and Kristian Rydqvist, ‘Initial Public Offerings: International Insights’, Pacific-Basin Finance Journal (1994) 2, 165.
17 For example, the price switches from €10 (the offering IPO price) to €9 with an overpricing of 10 per cent.
18 See Liungsqvist (n. 14), 384. Other theories to explain underpricing are (i) institutional theories; (ii) agency costs theories; (iii) behavioural finance theories.
19 So, underpricing depends on which of these actors has more information, Liungsqvist (n. 14), 400 for the company and 396 for the syndicating banks.
20 On this model, see Kevin Rock, ‘Why New Issues are Underpriced’, Journal of Financial Economics (1986) 15, 187.
21 See Lawrence M. Benveniste and Paul A Spindt, ‘How Investment Bankers Determine the Offer Price and Allocation of New Issues’, Journal of Financial Economics (1989) 24, 343.
22 For the book-building system, see Lawrence M. Benveniste and William J. Wilhelm Jr, ‘Initial Public Offering: Going by the Book’, Journal of Applied Corporate Finance (1997) 10, 98.
23 See e.g. Francesca Cornelli and David Goldreich, ‘Bookbuilding and Strategic Allocation’, Journal of Finance (2001) 56, 2337; Francesca Cornelli and David Goldreich, ‘Bookbuilding: How Informative is the Order Book?’, Journal of Finance (2003) 58, 1415.
24 For instance for the US, see Reena Aggarwal, Nagpurnanand R. Prabhala, and M. Puri, ‘Institutional Allocation in Initial Public Offerings: Empirical Evidence’, Journal of Finance (2002) 57, 1421; also for Europe and other countries, see Alexander P. Ljungqvist and William J. Wilhelm Jr, ‘IPO Allocations: Discriminatory or Discretionary?’, Journal of Financial Economics, (2002) 75, 167; more recently, Tim Jenkinson, Howard Jones, and Felix Suntheim, ‘Quid Pro Quo? What Factors Influence IPO Allocations to Investors?’, Journal of Finance (2018) 73, 2303.
25 The third price-setting system is an open system based on (Dutch) auction, which is not so diffused and was used, for instance, in the IPO of Google in 2004, on which see Anita I. Anand, ‘Is the Dutch Auction IPO a Good Idea?’, Stanford Journal of Law, Business & Finance (2006) 12, 233; for a comparison between auction and bookbuilding, see Zhaohui Chen, Alan D. Morrison, and William J. Wilhelm Jr, ‘Another Look at Bookbuilding, Auctions, and the Future of the IPO Process’, Journal of Applied Corporate Finance (2014) 26, 19.
26 Theoretical models analyse the optimal use of the bookbuilding system under different conditions, see e.g. Lawrence M. Benveniste and William J. Wilhelm, ‘A Comparative Analysis of IPO Proceeds under Alternative Regulatory Environments’, Journal of Financial Economics (1990) 32, 173; Ann E. Sherman, ‘IPOs and Long-Term Relationship: An Advantage of Book Building’, Review of Financial Studies (2000) 13, 697; Ann E. Sherman and Sheridan Titman, ‘Building the IPO Order Book: Underpricing and Participation Limits with Costly Information’, Journal of Financial Economics (2002) 65, 3.
27 A useful review is provided by Tim Jenkinson and Howard Jones, ‘The Economics of IPO Stabilization, Syndicates and Naked Shorts’, European Financial Management (2007) 13, 616; see also William J. Wilhelm Jr, ‘Secondary Market Stabilization of IPOs’, Journal of Applied Corporate Finance (1999) 12, 78.
28 After some rules introduced in 1934, the SEC first regulated stabilization in 1940 and then again in 1955. See in general George S. Parlin and Edward Everett, ‘The Stabilization of Securities Prices’, Columbia Law Review (1949) 49, 607; William Ward Foshay, ‘Market Activities of Participants in Securities Distributions’, Virginia Law Review (1959) 45, 907.
29 See SEC, Anti-Manipulation Rules concerning Securities Offerings; Final Rule, Friday, January 3, 1997, in Federal Register, Vol. 62, No. 2, 519–50.
30 For a proposal of Reform of Regulation M, SEC, Amendments to Regulation M: Anti-Manipulation Rules concerning Securities Offerings: Proposed Rule, Friday, 17 December 2004, in Federal Register, Vol. 69, No. 242, 75774–95.
31 Louis Kaplan, ‘Rules versus Standards: An Economic Analysis’, Duke Law Journal (1992) 42, 557. Regulation M is integrated by Item 508(i) (plan of distribution: stabilization and other transactions) of Regulation S-K to disclose ex ante in the registration statement, among others, also information about stabilization activity. Financial Industry Regulation (FINRA) Rule 5190 specifies other requirements.
32 According to Regulation M Rule 100, ‘stabilize’ or ‘stabilizing’ means the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing, or maintaining the price of a security.
33 See Reena Aggarwal, ‘Stabilization Activities by Underwriters after Initial Public Offerings’, Journal of Finance (2000) 55, 1075, 1082.
34 According to Regulation M Rule 100, a syndicate covering transaction means the placing of any bid or the effecting of any purchase on behalf of the sole distributor or the underwriting syndicate or group to reduce a short position created in connection with the offering.
35 See e.g. Thomas L. Hazen, The Law of Securities Regulation (St Paul: West Academic Publishing, 2016), 74; James D. Cox, Robert W. Hilman, and Donald C. Langewoort, Securities Regulation. Cases and Materials (New York: Wolters Kluwer, 2013), 155.
36 See Hazen (n. 35), 99.
37 See Hazen (n. 35), 103.
38 While originally the overallotment option was used in order to minimize the reneging costs, the greenshoe option to cover the risks associated with the overallotment option was introduced only in 1963. See Chris J. Muscarella, John W. Peavi III, and Michael R. Vetsuypens, ‘Optimal Exercise of the Over-Allotment Option in IPOs’, Financial Analysts Journal (1992) 48, 76; Craig G. Dunbar, ‘Overallotment Option Restrictions and Contract Choice in Initial Public Offerings’, Journal of Applied Corporate Finance (1997) 3, 251; Robert S. Hansen, R. Beverly, and Vahan Janjigian, ‘The Over-Allotment Option and Equity Financing Flotation Costs: An Empirical Investigation’, Financial Management (1987) 16, 24; J. F. Cotter and R. S. Thomas, ‘Firm Commitment Underwriting Risk and the Over-Allotment Option: Do We Need Further Legal Regulation?’, Securities Regulation Law Journal (1998) 26, 245.
39 The limit to the exercise of the greenshoe option was 10 per cent but since 1983 it has been fixed by the National Association of Securities Dealers (NASD) (FINRA) at 15 per cent of the registered shares; see Rules 5110 (and 5190), http://www.finra.org.
40 For a recent general review of the economics of flipping with an empirical analysis of the Indian IPO market, see Suman Neupane et al., ‘Do Investors Flip Less in Bookbuilding than in Auction IPOs?’, Journal of Applied Corporate Finance (2017) 47, 253.
41 See Lombardo (n. 4), 38.
42 The IPO company could be considered the cheapest cost avoider and for this reason should bear the risks associated with the underwriting system of a firm commitment contract, which with the open price system and the bookbuilding procedure has granted an average reduction of underpricing.
43 For a general introduction to the topics, see Marco Ventoruzzo, ‘The Concept of Insider Dealing’, in: Ventoruzzo and Mock (n. 2), 13–32; Sebastian Mock, ‘The Concept of Market Manipulation’, in: Ventoruzzo and Mock (n. 2), 33–46.
44 See Marco Ventoruzzo and Chiara Picciau, ‘Inside Information’, in: Ventoruzzo and Mock (n. 2), 175–207.
45 See Jesper Lau Hansen, ‘Insider Dealing’, in: Ventoruzzo and Mock (n. 2), 208–53; Chiara Mosca, ‘Unlawful Discourse of Inside Information’, in: Ventoruzzo and Mock (n. 2), 275–96; Jesper Lau Hansen, ‘Prohibition of Insider Dealing and of Unlawful Disclosure of Inside Information’, in: Ventoruzzo and Mock (n. 2), 326–31.
46 See Alan Pietrancosta, ‘Public Disclosure of Inside Information and Market Abuse’, in: Ventoruzzo and Mock (n. 2), 47–62 and 343–84.
47 On the MAD, see Ferrarini (n. 3), 724; for the definition of market manipulation in the MAR, see Arad Reisberg, ‘Market Manipulation’, in: Ventoruzzo and Mock (n. 2), 309–18; for the prohibition of market manipulation in the MAR, see Sebastian Mock, ‘Prohibition of Market Manipulation’, in: Ventoruzzo and Mock (n. 2), 332–36.
48 Article 3(2)(a), MAR defines securities, including shares and other securities equivalent to shares, bonds, and other forms of securitized debt or securitized debt convertible or exchangeable into shares or into other securities equivalent to shares.
49 The stabilization of securities can also be pursued by means of a transaction of associated instruments (Art. 5(4) and 3(2)(d) MAR), where associate instruments are defined by Article 3(2)(b), MAR, which includes some financial instruments (admitted or traded on a trading venue or not) as (i) contracts or rights to subscribe for, acquire, or dispose of securities; (ii) financial derivatives of securities; (iii) where securities are convertible or exchangeable debt instruments, the securities into which such convertible or exchangeable debt instruments may be converted or exchanged; (iv) instruments which are issued or guaranteed by the issuer guarantor of the securities and whose market price is likely to materially influence the price of the securities, or vice versa; (v) where the securities are securities equivalent to shares, the shares represented by those securities, and any other securities equivalent to those shares.
50 Article 2(d), Prospectus Regulation provides the notion of ‘offer of securities to the public’ as a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities with the specification that the definition includes also the placing of securities through financial intermediaries.
51 While Regulation 2273/2003 included in the notion of significant distribution an initial or secondary offer publicly announced, the requisite of public announcement has been eliminated in Regulation 2016/1052, apparently with the result that it can be also a private placement.
52 The initial price discovery of IPOs, i.e. the time after negotiations start on the market, is analysed by Reena Aggarwal and Pat Conroy, ‘Price Discovery in Initial Public Offerings and the Role of the Lead Underwriter’, Journal of Finance (2000) 52, 2903.
53 The notion of overallotment facility presents some variations in the Italian, German, French, and Spanish linguistic versions of Regulation 2016/1052. Italian: facoltà di sovrallocazione; German: Überzeichnung; French: faculté de surallocation; Spanish: instrumento de sobreasignación.
54 The linguistic versions of Regulation 2016/1052 present the following patterns: Italian: contratto di sottoscrizione o contratto di collocamento; German: Emissions-bzw Garantievertrag; French: convention de prise ferme ou de l’accord de gestion du placement; Spanish: acuerdo de suscripción o en el acuerdo de gestión principal.
55 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending 2002/92/EC and Directive 2011/61/EU (2014) OJ L173/349.
56 The versions of section A in the four languages are: English: (6) Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; (7) Placing of financial instruments without a firm commitment basis; Italian: 6) Assunzione a fermo di strumenti finanziari e/o collocamento di strumenti finanziari sulla base di un impegno irrevocabile. 7) Collocamento di strumenti finanziari senza impegno irrevocabile; German: (6) Übernahme der Emission von Finanzinstrumenten und/oder Platzierung von Finanzinstrumenten mit fester Übernahmeverpflichtung; (7) Platzierung von Finanzinstrumenten ohne feste Übernahmeverpflichtung; French: (6) Prise ferme d’instruments financiers et/ou placement d’instruments financiers avec engagement ferme; (7) Platzierung von Finanzinstrumenten ohne feste Übernahmeverpflichtung; Spanish: 6) Aseguramiento de instrumentos financieros o colocación de instrumentos financieros sobre la base de un compromiso firme. 7) Colocación de instrumentos financieros sin base en un compromiso firme.
57 The proper set of incentives at stake can also be analysed with respect to the type of underwriting agreement between the offeror and the syndicating banks: stabilization is more important for the syndicating banks in case of an agreement where the risk is supported by them, i.e. by the firm commitment agreement.
58 Italian: accettare sottoscrizioni o offerte di acquisto; German: Zeichnungs-oder Kaufangebote; French: les souscriptions ou les offres d’achat; Spanish: aceptación de suscripciones u ofertas para comprar.
59 This interpretation relies on the fact that the term ‘subscription’ refers both to the subscription of new shares coming from a company capital increase during the IPO and to the subscription of old shares coming from selling shareholders, which is technically not a subscription but a purchase. Otherwise, an alternative but less plausible interpretation, would be that the term ‘acceptance of subscriptions’ refers to a capital increase of the IPO company and the creation of new shares that have to be subscribed by the investors, while the term ‘offers to purchase’ refers to the selling of old shares coming from previous holders, which seems to replicate Article 17(1)(a), Prospectus Regulation that refers to (i) the acceptances of the purchase and to the acceptance of subscription so taking into consideration the case of the selling shareholders and the capital increase.
60 See for instance for Germany, Stefano Lombardo, ‘Invitatio ad Offerendum und Overallotment und Greenshoe Option in Deutschland’, in: Thomas Eger et al. (eds), Internationalisierung des Rechts und seine ökonomische Analyse (Internationalization of the Law and its Economic Analysis). Festshrift für H.-B. Schäfer zum 65. Geurtstag) (Wiesbaden: Gabler, 2008), 537–45 and for Italy, Paolo Giudici and Stefano Lombardo, ‘La tutela degli investitori nelle IPO con prezzo di vendita aperto’, Rivista delle società (2012) 57, 907.
61 Article 17(1)(a), Prospectus Regulation refers to (i) the acceptances of the purchase and to the acceptance of subscription, so taking into consideration the case of the selling shareholders and the capital increase.
62 See Boreiko and Lombardo (n. 4).
63 In the case of debt securities and other cases, Article 5(3), Regulation 2016/1052 provides for more complex rules. In an SEO, being already negotiated on a trading venue as in the case of the grey market, the stabilization period starts on the date of adequate public disclosure of the final price and ends thirty days after the date of allotment.
64 See e.g. Francesca Cornelli, David Goldreich, and Alexander Ljungqvist, ‘Investor Sentiment and Pre-IPO Markets’, Journal of Finance, 2006, 61, 1187.
66 Rule 105 of Regulation M eliminates the possibility of creating a grey market before negotiations officially start.
67 Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (2017) OJ L87/1.
68 That offerings of securities, and particularly IPOs can be extremely delicate has been previously stressed by the SEC in 2005; see SEC, Commission Guidance regarding Prohibited Conduct in Connection with IPO Allocations; Final Rule, Wednesday, 13 April 2005, in Federal Register, Vol. 70, No. 70, 19672–7.
69 On conflict of interests in the MiFID context, see the very general introduction by Stefan Grundmann and Philipp Hacker, ‘Conflict of Interests’, in: Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets. MiFID II and MiFIR (Oxford: OUP, 2017), 165.
71 Recital 58: ‘Investment firms engaged in underwriting or placing activities should have appropriate arrangements in place to ensure that the pricing process, including bookbuilding, is not detrimental to the issuer’s interests.’
74 Article 7(2), Regulation 2016/1052 defines the price limitations in case of debt instruments.
75 Adequate public disclosure is defined in Article 1(b), Regulation 2016/1052 in terms of making information public in a manner which enables fast access and complete, correct, and timely assessment of the information by the public, in accordance with the mentioned provisions. Furthermore, Recital 8 specifies that market integrity requires the adequate public disclosure of stabilization measures.
76 See Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny, and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No. 809/2004, 2019, L166/26 has provided the ex ante disclosure of the possible stabilization activity, for instance in point 6.5 of Annex XI.
77 See Lombardo (n. 4), 179.
78 The allotment is defined by Article 1(d), Regulation 2016/1052 in terms of process or processes by which the number of securities to be received by investors who have subscribed or applied for them is determined. Notwithstanding the fact that from a contractual perspective this definition is not completely clear with respect to the terms subscribed and applied, it is important to stress that the allotment itself is covered by the prohibition of market manipulation and insider trading. This is particularly significant with the bookbuilding procedure and the possible behaviour of the syndicating banks to inflate the offering price (i.e. to manipulate it) in the knowledge of inflating it, possibly shifting the expensive shares to ignorant retail investors and to intentionally overpricing the IPO. On these problems, see Giudici and Lombardo (n. 60). In other words, the bookbuilding/allotment procedure in Europe is covered by the MAR in the interests of the integrity of the capital market.
79 On the point see also Mock (n. 6), 156.