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In this article in Business Insider they state that

The Chicago-based company is offering 4.7 percent of its stock, less than any U.S. Internet-company IPO of more $200 million since at least 2000, according to data compiled by Bloomberg.

I took this that after issuing all of their shares the company elected to make only 4.7% of them available for trading on the stock exchange. If so where are the remaining shares? Why are they not available to trade on the exchange?

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(Who voted this off-topic? Please, it isn't. Understanding how initial offerings work is important for an investor's knowledge.) –  Chris W. Rea Nov 18 '11 at 17:03
    
No, it's a fine question, take out the company name and it applies to all IPOs where the shares outstanding appear to be such a small fraction of the company float. And the answers so far appear pretty insightful. –  JoeTaxpayer Nov 18 '11 at 17:10
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2 Answers 2

up vote 4 down vote accepted

The original investors and founders own them. Think about it this way - When you hear that an IPO priced at $10 opened at $50, is that 'good or 'bad'? Of course, it depends who you are. If you are the guy that got them at $10, you're happy. If you are the founder of the company, you are thinking the banker you paid to determine a market price for the IPO failed. Big. He blew it, basically as you just sold your company for 20% of the perceived value.

But, instead of selling all the shares, just sell, say, 5%. Now, the IPO opening price is just a way to understand the true value of your company while keeping 95% of the upside once the market settles down to a regular trading pattern. You can slowly sell these shares into the market or you can use them as cash to take over other companies by buying with these shares instead of actual cash.

Either way, the publicly traded shares should trade based on the total value of the company and the fraction they represent.

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Is it possible that by selling a very small portion of the shares, the other shareholders limit supply so much such that the price is artificially high? –  Zameer Manji Nov 18 '11 at 15:50
    
@Zameer Certainly. –  Chris W. Rea Nov 18 '11 at 17:02
    
Which is why subsequent sales need to be moderated, a secondary offering of the balance of shares can easily tank (cause a large drop) the price. –  JoeTaxpayer Nov 18 '11 at 17:11
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Many people have criticized the Groupon IPO model because it doesn't make sense as an investment, unless you are an insider with cheap shares.

Basically, you have:

  • A hot, unprofitable company.
  • 95% of the company held by insiders or investors
  • Insiders with a track record of putting their personal interests ahead of stockholders.
  • The potential that management will flood the market with shares in subsequent offerings.
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