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The Supercharged IPO

Posted by on Monday, March 24, 2014 in Articles, Volume 67, Volume 67, Number 2.

1 – Fleischer&Staudt_67_Vand_L_Rev_307

A new innovation on the IPO landscape has emerged in the last two decades, allowing owner-­founders to extract billions of dollars from newly public companies. These IPOs␣labeled supercharged IPOs␣have been the subject of widespread debate and controversy: lawyers, financial experts, journalists, and members of Congress have all weighed in on the topic. Some have argued that IPOs are “brilliant, just brilliant,” while others have labeled them “underhanded” and “bizarre.”

In this Article, we explore the supercharged IPO and explain how and why this new deal structure differs from the more traditional IPO. We then outline various theories of financial innovation and note that the extant literature provides useful explanations for why supercharged IPOs emerged and spread so quickly across industries and geographic areas. Theory provides support for both legitimate and opportunistic uses of the supercharged IPO.

With the help of a large-­N quantitative study␣the first of its kind␣we investigate the adoption and diffusion of this new innovation. We find that the reason parties have begun to supercharge their IPOs is not linked to a desire to steal from naive investors but rather for tax-­planning purposes. Supercharged IPOs enable both owner-­founders and public investors to save substantial amounts of money in federal and state taxes. We conclude our study by demonstrating how our empirical findings can be used to (1) advance the literature on innovation, (2) assist firms going public in the future, and (3) shape legal reform.