Subscription to the private offering of our first live company share is now available on CapBridge (www.capbridge.sg), followed by a bidding process where investors participate in a Dutch Auction in order to be allocated shares. We explain further what a Dutch Auction is and how it can help with the bidding process.

What is a Dutch Auction?

A Dutch Auction is a public offering auction structure in which investors place a bid for the amount and price of securities they are willing to purchase. All bids are accepted starting from the highest bid price downwards until all securities are sold. [1]This process is similar to the Certificate of Entitlement system used to bid for vehicle licenses in Singapore, and was also used during Google’s IPO back in 2004. Refer to Figure 1 for an illustration.

How does a Dutch Auction work?

The listing company first decides the number of shares they would like to sell, in this case, 125 shares. In addition, they also set a Reserve Price – the lowest price at which the shares can be sold ($20 in this instance). Bids below the Reserve Price are typically not accepted.

All investors will submit a bid which comprises the number of shares and the price per share they are willing to pay. From Figure 1, bids range from $5 to $95. All bids are then consolidated and arranged in a list from the highest to lowest price. Successful bids will be allocated from the highest price onwards until all shares are sold. A Final Price is determined as the price of the last share sold. All successful investors, i.e., bids $65 and above will pay $65 per share.

What are the benefits of a Dutch Auction?

A Dutch Auction offers a fair, orderly and transparent pricing process. Traditional initial public offerings (“IPOs”) often involve very complex book-building processes to determine the listing price per share. Investment bankers (underwriters) bring the top management of the listing company to meet with institutional investors to gauge their interest in the IPO.[1] Apart from marketing the stock in advance, it also enables underwriters to assess the market’s attitude.

However, price setting in an IPO process may prove to be unreliable. [2] Because it is based entirely off the underwriter’s perception of investors’ responses, this is a subjective barometer to determine market interest for the listing company’s shares. In turn, this occasionally results in underpricing – the share price during the first day of trading far exceeds the subjective price tag attached by underwriters prior to IPO. To this end, a Dutch Auction helps to minimize such phenomena.

Finally, a Dutch Auction opens up opportunities for more investors to participate as the bidding process is available to anyone. This is aided by the simplicity and short implementation time frame which removes the cumbersome complications in the share bidding process.

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[1] Mcgeehan, Patrick. “Pick-Your-Price Public Offerings.” The New York Times. March 03, 2006. Accessed May 23, 2019. https://www.nytimes.com/2006/03/03/technology/pickyourprice-public-offerings.html.

[2] Frino, Alex, Jeffrey Wong, and Jagjeev Dosanjh. The Efficiency in Pricing of Initial Public Offerings: A Comparison of Australian and US Markets. Master’s thesis, Macquarie University Graduate School of Management, 2014.

[3] Frino, Alex, Jeffrey Wong, and Jagjeev Dosanjh. The Efficiency in Pricing of Initial Public Offerings: A Comparison of Australian and US Markets. Master’s thesis, Macquarie University Graduate School of Management, 2014

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