In a directed share program—often called a “friends and family” program—the company requests the lead managing underwriters to reserve a portion of the offering for sale to persons designated by the company, such as employees, customers, vendors or other persons having a business relationship with the company. Directed share programs are intended to reward friends of the company by providing an opportunity to purchase shares at the IPO price in advance of anticipated price appreciation and to strengthen the company’s important business relationships by encouraging investments in the company.
Directed share programs reached their zenith in the Internet-company mania of the late 1990s, when many IPO stocks shot up in price and IPO allocations for retail investors were particularly scarce. The popularity of directed share programs has since waned, due in part to the return of more moderate post-IPO price gains, and these programs have shrunk in size.
In their heyday, directed share programs were present in about two-thirds of all US IPOs and often represented 10% or more of the offering. In recent years, less than half of US IPOs have had directed share programs, with 5% of the offering size now the norm. Directed share programs can also produce unfriendly investment returns: in both 2008 and 2011, the average IPO declined in price by year-end, leaving participants with losses. In contrast, the average IPO of 2012 ended the year trading 22% above its offering price, leaving participants in many of last year’s directed share programs with attractive investment returns.