In my opinion, this is incorrect. The purpose of the IPO roadshow is to market the issue to institutional investors and to build the order book. Building the book is a process whereby the institutional investors give orders for a number of shares at a certain price. It is this process that the book-running underwriter determines the "market" price for the IPO. At the beginning of the roadshow, the underwriters establish a pricing range for the IPO, but this initial range is often shifted higher or lower depending on road show demand, and the final pricing is dictated by supply and demand. It is true that the price at which institutional investors buy IPO shares usually contains an "IPO discount" but this discount provides an incentive to all IPO investors to invest in these risky propositions. Also, in my view, investors purchasing stock in an IPO once it starts trading are basically bettors and are gambling that the stock price will go up. Stock prices are typically very volatile after an IPO and so these IPO speculators should bear the risks of their bet.
I believe the IPO process generally works well, and my thoughts on how to improve it relate to disclosure. I'm a big believer in disclosure as it helps the markets operate more efficiently. The more information, the better. To improve the IPO process, I would have all of the underwriting syndicate's projected revenue and earnings estimates for the company disseminated publicly so that all institutional and retail IPO investors are working with the same information. In addition, if the company revises guidance during the IPO process, this information should also be made public. Finally, while I'm on a roll, I believe that every IPO should disclose at least five years of annual and three years of quarterly financial and operating data, and that the metric "free cash flow" should be a required reporting metric.
Link to The Wall Street Journal article:
The letter from Congress to the SEC can be found here: