It happens in all manner of goods, and it happens in securities. IPOs are priced higher than they would be in a truly competitive market. Rarely can the increase explained by stronger fundamentals. And it usually can't be explained by a reduction in risk. The sharp increase in price is best explained by who is buying, not by what is being sold.
Companies now use IPOs to raise venture capital.
More and more, IPO issuers are unprofitable and have highly unstable business models. The issuer's early stage of development and high risk make them a venture capital investment. Yet, no venture capital firm considers investing at the valuations charged the public. Prospectuses do not disclose an issuer's valuation . As a result, it is difficult for public investors to evaluate the attractiveness of the deal.