The price of an IPO is set jointly by the company and the lead underwriters. For at least five decades, studies have shown that IPOs generally trade on the open market at a price significantly higher than the offering price.

Until the late 1990s, IPOs were underpriced by 5 to 20 percent, but in the “hot issues” market of 1998 to 2000, IPOs frequently surged to 100 to 200 percent of the offering price on the first day of trading. In the period from October 1982 to June 1998, the number of shares traded in the first five days after the IPO was on average equal to 85 percent of the shares offered. In the period from July 1998 to 2000, the number of shares traded in the first five days after IPOs increased to more than 350 percent of the shares issued.

Would an issuer or investors have any basis for suing the lead underwriters if post-IPO they learned that the underwriter had signaled to potential purchasers that they would be allocated shares in high-demand IPOs only if they were willing to buy additional shares in the aftermarket at prices above the IPO price or to purchase less attractive IPO shares or to pay excessive commissions? If so, how would the issuer or investors prove that they had been damaged by such an undisclosed arrangement? If the arrangement had been disclosed to the issuer, would purchasers in the aftermarket have any claims against the issuer and its officers and directors or against the lead underwriters and their officers and directors?