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Firms or underwriters offer clients underpriced shares of an IPO—normally those that are of a popular issue—in order to get new business.
Meanwhile, the preferred customer enjoys benefits like equity gains that come with investing in a dynamic new public company.
Since IPO gains often mostly happen in the first day of trading, demand is very strong for hot IPO shares that can be easily flipped on the first day of trading for a sizable profit for the underwriting broker.
Some underwriters took the opportunity to allocate shares to their friends in the business in the hopes of garnering future investment banking business from them.
The social harm that now is outlawed entails the wrongful delivery of the monetary value of the discounts to preferred investors selected by securities firms.
The startup company selling the IPO could have obtained a higher price by selling directly to ordinary investors if the securities firm had not sold them to selected investors at a discount.
Individuals or companies that are found in violation may be heavily fined. According to a study by professors Xiaoding Liu and Jay R.
Ritter of the University of Florida, spinning actually accomplishes its goals. However, the study's authors also noted that "since the spinning of corporate executives has largely ceased in the U.
This is due to both a regulatory crackdown and a dearth of hot IPOs to allocate. Goldman Sachs and Meg Whitman, former CEO of eBay were embroiled in a conflict of interest scandal that was considered to be spinning dating back to the early s.
While she was CEO, Whitman was appointed as a Goldman Sachs board member in Her appointment supposedly gave her access to information about IPOs of hot stocks, and she was named in a congressional investigation into spinning.
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