IPO Share Allocations: Why Popular Deals Can Leave Investors With Less

IPO demand can be a misleading signal. A popular offer may leave individual investors with only a small allocation, while a less sought-after deal may fill an application in full. The historical figures in this account suggest that investors should judge an IPO by its price and risks, not by how much demand it attracts.

Consider two UK investors who bought SpaceX shares this summer. One received shares at the $135 offer price in June. The other bought at $160.95 after trading began. By the end of October, the first investor was roughly even in dollar terms; the second was down about 16%. The difference came from the price paid, despite the investors owning shares in the same company just a day apart.

What IPO returns have looked like

Jay Ritter, a finance professor at the University of Florida, has tracked US IPOs since 1980. Among the largest companies in his data, defined as businesses with annual sales above $1 billion after inflation adjustment, shares gained an average of 9.8% on their first trading day.

That first-day rise went to investors who received shares at the offer price. Buyers who waited until the close of the first day missed it. During the following three years, shares in those large companies rose roughly in line with the wider US market, underperforming it by about two percentage points on average. The record was worse for smaller companies, which lagged the market by 34 percentage points.

These averages don’t predict how a particular IPO will perform. They do show why the offer price matters. Someone buying after trading starts may pay a premium over the price offered to initial applicants, without a historical pattern of earning extra return to compensate. They also take on the risk of one company rather than the broader exposure of a market investment.

If an offer gives you fewer shares than you requested, pause before trying to buy more once trading begins. Compare the market price with the offer price and decide whether the company still makes sense at that higher cost. A first-day surge can look like evidence of strong prospects, but it can also mean that early buyers received a one-off gain that later buyers have already paid for.

Why popular offers are rationed

Companies and platforms may limit allocations when applications exceed the shares available. SpaceX’s IPO was offered to UK investors through a platform under rules that allow companies to sell to private investors without a UK prospectus. Demand reached almost $1 billion. Applications were filled in full only up to £2,013; larger requests received fewer shares than requested.

Jersey Mike’s, a US sandwich chain, used the same route for its New York flotation in July. Its full-allocation limit was higher, at about £3,190. Yet its shares closed the first day 6% below the offer price and were about 20% lower by the end of October. Investors could receive more of this deal precisely because demand did not overwhelm the available shares.

This pattern is known as the winner’s curse. Economist Kevin Rock described the mechanism in 1986: investors with better information tend to apply heavily for attractive offers and avoid weaker ones. Other applicants may then receive only a fraction of the shares in popular deals, but get their full request in less popular ones. If investors expect that outcome, an offer may need to be priced at a discount to attract them.

Research on Israeli flotations in the early 1990s offers one test of the idea. In that market, applicants were scaled back by the same proportion and allocation details were published. Researchers found that applicants received more shares in offers that later appeared overpriced. Although flotations returned an average of 12% initially, ordinary applicants earned a negative return after accounting for the shares they actually received.

The lesson isn’t that a heavily subscribed IPO must disappoint. Two recent examples can’t establish that, and allocation data alone can’t tell you what a company is worth. Demand tells you that many investors want in at the offered price; it doesn’t show whether that price leaves room for future gains.

Company valuations can change sharply

Anthropic could be another company to offer shares to UK investors. Its filing, published on 26 October, says the offering includes a public offer in the UK. Bloomberg reported that Anthropic was working with RetailBook to accept UK orders through investment platforms and might reserve 15% to 20% of shares for private investors worldwide. Those arrangements weren’t final, and no offer price had been set.

Before considering an application, investors would need the final price and terms. A private valuation or a large amount of interest cannot substitute for that information. The value investors assign to the same business can shift considerably between private transactions and a public listing.

Starling founder Anne Boden sold her remaining shares at a valuation of £1.7 billion, Sky News reported in October. That was less than half the £4 billion valuation the bank was reportedly seeking the previous year. Monzo was also in talks with private equity firms about selling a stake after takeover discussions with Brazil’s Nubank ended. Neither British bank appeared close to a flotation at that point.

Shein provides a further example of how expectations can meet market pricing. The fast-fashion retailer was reportedly valued at about $100 billion in private markets in 2022. It listed in Hong Kong on 1 September at roughly a quarter of that valuation. The offer was 5.6 times subscribed, with only about half of applicants receiving shares. The stock closed its first day just below the offer price and was about 25% lower by the end of October. In this case, high demand and rationing didn’t prevent a fall.

Checks to make before applying

• Set a spending limit. Decide in advance how much you can afford to put into the offer. Treat any allocation as a small, speculative holding rather than a substitute for a diversified portfolio.
• Request an amount you could hold in full. If demand is weak, you may receive all the shares you asked for. Choose an application size that still feels manageable in that situation.
• Check account eligibility and charges. Ask whether the shares can be held in an ISA or SIPP, and review the platform’s currency conversion fee if the offer is priced in another currency.
• Read the offer terms before submitting. An accepted application is binding. The terms explain whether and when you can withdraw; the usual option described for these offers is withdrawal if significant new information emerges during the offer period.
• Look at insider sale restrictions. The prospectus should explain when company insiders can sell. SpaceX is releasing insiders in stages, and Elon Musk’s shares are locked up until 12 June 2027. Such restrictions can affect how many shares may become available later.

Offer access is only one part of the decision. The price, allocation rules, account costs, withdrawal terms and potential selling by insiders all shape what an investor is taking on. For a large IPO, receiving fewer shares may be frustrating, but it doesn’t make buying at a higher market price automatically attractive.

The historical pattern here favors access to the offer price for capturing any first-day rise, while leaving later buyers with company-specific risk and returns that have broadly tracked the market, or lagged it. If you decide to apply, size the position so a full allocation is acceptable, and reassess the price before buying more after trading starts.