Markets

What an IPO Is and Who Gets Paid

An IPO is two trades a day apart. Who sells, who gets an allocation at the offer price, who keeps the first day pop, and what the free prospectus tells you first.

By the Euphoria team · 2026-07-31 · 9 min read

Two trades, a day apart, reported as one event

An initial public offering is usually described as a company going public, which names the outcome and hides the transaction. Follow the money instead and the thing becomes legible, because an IPO is two different trades that happen about a day apart.

In the first trade, the company sells newly created shares at a fixed price to a list of buyers assembled by its investment banks. That price is set the evening before trading opens. No exchange sets it and no member of the public bids on it.

In the second trade, the next morning, those buyers and the general public trade the same shares with each other at whatever price the market produces. The company is not a party to that trade. It has already sold, at the price agreed the night before, and it receives nothing further no matter what the stock does.

Almost every confusing thing about IPOs dissolves once you keep those two trades apart in your head.

• 96% of midsized US IPOs from 2001 to 2016 priced at a gross spread of exactly 7 percent
• 180 days the typical lock-up before existing holders may sell
• $0 what a company receives from shares sold by its existing holders

The document is already public, and it is free

Before any of that, the company files a registration statement with the SEC, typically on Form S-1. Most of that filing is the prospectus, the offering document describing the business, the risks, the finances and the terms of the deal.

It is public. Anyone can read it at no cost on EDGAR, the SEC filing database, along with every amendment, filed as S-1/A, and the final prospectus filed after pricing, usually a 424B4. SEC staff review the filing for compliance with disclosure requirements, and the agency's own investor bulletin is careful about what that review is not. Declaring a registration statement effective is not an approval of the offering's merits and not a guarantee that the disclosure is complete or accurate. Responsibility for that sits with the company.

A handful of sections repay reading more than the rest. Use of Proceeds says what the company intends to do with the money. Dilution spells out the gap between what new investors are paying per share and what existing holders paid. Principal and Selling Shareholders says who is selling and how much they keep.

The fee that does not move

A company does not sell shares to the public by itself. It hires an underwriting syndicate, a group of investment banks that manage the offering, market it to investors, and buy the shares from the company in order to resell them.

The syndicate is paid through the gross spread, the difference between what it pays the company per share and what it sells that share for. The spread is quoted as a percentage of gross proceeds and it comes out of the company's money before the company sees any of it.

What is striking about that percentage is how little it varies. An SEC Commissioner laid out the numbers in a 2018 speech: from 2001 through 2016, over 96 percent of midsized IPOs priced at a gross spread of exactly 7 percent, up from roughly nine in ten during the late 1990s. Midsized there meant trailing twelve month sales between $50 million and $1 billion. Among the very largest offerings, nearly half paid less than 7 percent.

A price that lands on precisely the same figure in 96 percent of transactions is not behaving much like a price. Whether that reflects a fair rate for a genuinely risky service or thin competition among a small group of banks is a live argument. The Commissioner was making the second case. Take it as a contested question rather than a settled one, and notice that the clustering itself is the measurement everyone agrees on.

Who sets the price, and who gets the shares

The offer price emerges from a process called bookbuilding. Underwriters solicit indications of interest from institutional clients and compile an order book recording how many shares each would buy and at what price. That book, alongside valuation work, informs a recommended price. The company makes the final call.

Two interests pull against each other here, and the SEC bulletin names both. A higher price raises more capital for the company and pays the banks more, since their compensation is a percentage of the offering. But the underwriters also have to place the entire deal with clients they will need again next quarter, and a price set too high does not clear. Underpricing creates a discount for the initial buyers, lifts demand, and helps the syndicate sell every share.

Then there is allocation, which is the part rarely explained to individual investors. Shares at the offer price go to the underwriters' clients, and the bulletin is direct about who those are: underwriters and dealers distribute most of the shares to their institutional and high net worth clients, meaning mutual funds, hedge funds, pension funds, insurers and wealthy individuals. For a typical investor, it says, being able to buy directly into a popular IPO is a rare opportunity. The ordinary route is buying in the public market in the days afterwards.

The first day pop is a transfer, not value created

Here is the arithmetic that makes the whole structure make sense.

Take a share priced at $20 with a 7 percent gross spread. The syndicate keeps $1.40 and the company receives $18.60. The stock opens the next morning and closes its first day at $26.

That $6 went to whoever held an allocation at $20 and sold into the first day. It did not go to the company. The company's proceeds were fixed the previous evening at $18.60 a share, and a 30 percent first day rise is, from the company's side, evidence that it could have priced higher and raised more. The bulletin says so plainly: a large bump may satisfy the underwriters' client-investors, whose holdings just gained value, while leaving the company unsatisfied, because it might have sold the same shares for more.

A first day pop is not the company's win. It is the price of the discount that got the deal sold.

The bulletin also explains why first days lurch upward, and it has little to do with the business. The only shares that can trade are the ones sold in the offering. Everything else is either restricted under the securities laws or locked up by agreement, and underwriters discourage the immediate reselling they call flipping. A small floating supply meeting heavy demand moves a price a long way. Underwriters can also buy in the market during those first days to keep the price from falling far below the offer, and when that support ends the price can decline.

Primary, secondary, and a date about six months out

Two kinds of shares can sit in the same offering, and the difference decides where the cash goes.

A primary offering sells newly issued shares and the proceeds go to the company. A secondary component sells shares already owned by founders, employees or early investors, who are called selling shareholders. The bulletin is explicit that those proceeds do not go to the company and instead go to the selling shareholders. The cover page of the prospectus says how many shares fall into each bucket, which makes this something you look up rather than infer.

Most large IPOs are primary only, which is why the second date on the calendar matters so much. Existing holders normally sign a lock-up agreement promising not to sell for a set period, typically 180 days. Those shares do not vanish in the meantime. The bulletin calls the untradable remainder market overhang and warns that when a lock-up expires the share price may fall significantly if a large block becomes sellable all at once.

So an IPO has two supply events. The offering, with a deliberately thin float, and a second moment roughly six months later when the float can multiply. Both are disclosed in the prospectus before the stock ever trades.

Two other doors, and what each one changes

A traditional underwritten offering is not the only route to a public market.

In a direct listing, a company lists existing shares on an exchange without a syndicate selling new shares at a fixed offer price. There is no bookbuilding and no allocation, so there is no offer price for a first day pop to be measured against. Depending on the structure, there may be no new capital raised at all.

In a special purpose acquisition company, a shell raises money from public investors first and then hunts for a private business to merge with, taking that business public without a conventional offering. The trade-off is that public investors commit before the target is known, and the sponsor's stake plus the redemption rights of early holders can leave far less cash in the merged company than the headline raise implies.

Both routes register with the SEC and both end with a public company. What they change is who sets the price and who is standing on the other side of your purchase.

What to read first in the next one you hear about

When the next offering gets attention, four lookups in the prospectus will tell you more than a week of coverage.

• Use of Proceeds, for what the money is for.
• The cover page, for how much of the deal is the company selling new shares and how much is existing holders selling theirs.
• Underwriting, for the gross spread and the terms behind it.
• The lock-up description, for the date when the tradable supply changes.

All four sit in a free document filed before the stock trades. The first day price is the number everybody quotes and the one carrying the least information.

Euphoria's market lessons run in that order on purpose. You read the filing, then you see the price, which is the sequence a professional uses and the reverse of the sequence the news hands you.