Vonage: a better way?

As expected, Vonage is now a defendant in a class action lawsuit over its botched IPO. Good news for investors? Not really. It's good new for lawyers – who will likely settle and pad their pockets with fat fees.

Of course, in hindsight, the overwhelming sentiment is that Vonage should not have offered shares to customers, right? Well, maybe the company could have structured the program in a better way. This is according to Ann Sherman, who is an assistant professor at Notre Dame and an expert on IPOs. She even provided advice to Google on its auction IPO.

One suggestion is that, if there is weak demand from institutional investors, the retail investors would not get any allocation. Retail investors are often fickle and if the stock is weak, they may be inclined to dump their stock. This may, in fact, have been the case with the Vonage IPO.

Also, by allocating over 4 million shares to thousands of investors, it may have made it difficult to determine the appropriate price for the IPO. It's certainly a new thing for i-bankers to deal with (after all, it's rare for companies to issue shares to their customers).

Another approach is to find ways to favor informed investors (that is, weeding out those who are fickle). Sherman suggests an online multiple choice exam about the issuer: "It's like a driver's test, but for investors," she said. "An investment bank in Germany, Net.IPO, did this for a few years, giving tests based on the Prospectus. It's a way to favor those that have followed the company in the past, while still being open to anyone else, as long as they're willing to learn and make a sort of commitment to understanding the company. Net.IPO argued that investors that could pass the short multiple choice exams about the company were more likely to be long term investors."

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