They have wide latitude in allocating IPO shares. The SEC does not regulate the business decision of how IPO shares are allocated. Only a limited number of broker-dealers are invited into the syndicate as underwriters and some of them may not have individual investors as clients. Moreover, syndicate members themselves do not receive equal allocations of securities for sale to their clients. The underwriters in consultation with the company decide on the basic terms and structure of the offering well before trading starts, including the percentage of shares going to institutions and to individual investors.
Most underwriters target institutional or wealthy investors in IPO distributions.
Underwriters believe that institutional and wealthy investors are better able to buy large blocks of IPO shares, assume the financial risk, and hold the investment for the long term. The excess demand can only be satisfied once trading in the IPO shares begins. Underwriting firms that have a high percentage of individual investors as clients are more likely to allocate portions of IPO shares to individuals. Several online brokers offer IPOs, but these firms often have only a small allotment of shares to sell to the public. As a result, individual investors' ability to buy these shares may be limited no matter which firm they do business with.