Auction system and method for pricing and allocation during capital formation

We claim:

1. A computer implemented method for determining price and allocation of equity shares in an offering comprising: providing information about an offering to accept bids for equity shares to at least one qualified potential purchaser and at least one non-qualified potential purchaser; offering to accept bids only from one or more qualified potential purchasers via a communication network for equity shares, wherein at least one non-qualified potential purchaser submits a bid through a qualified potential purchaser; receiving bids via a communication network only from qualified potential purchasers of the offered shares; determining a clearing price for the offered shares based upon the received bids; allocating to prospective investors who bid a price above the clearing price all of the shares for which they bid; allocating to prospective investors who bid a price equal to the clearing price a pro-rata allocation of the shares for which they bid; and allocating zero shares to prospective investors who bid a price below the clearing price.

2. The computer implemented method of claim 1, wherein said step of determining a clearing price for the offered shares based upon the received bids is based on a prescribed amount of capital that is to be raised.

3. The computer implemented method of claim 1, wherein said step of determining a clearing price for the offered shares based upon the received bids is based on a prescribed number of shares being offered.

4. The computer implemented method of claim 1, wherein said step of offering to accept bids for equity shares further comprises setting an initial price range in which bids must be within or setting a minimum price bids must be above.

5. The computer implemented method of claim 3, wherein said step of determining a clearing price for the offered shares based upon the received bids comprises: arranging the received bids in descending order based on price; summing the aggregate quantity of shares bid for starting with the bid with the highest price and descending downward in price; and determining at which price the aggregate quantity of shares bid for is equal to or greater than the prescribed number of shares being offered.

6. The computer implemented method of claim 1, wherein said pro-rata allocation for a prospective investor who bid a price equal to the clearing price is calculated by: determining the total number of shares bid for above said clearing price; subtracting from a total number of shares being offered said total number of shares bid for above said clearing price; determining the product of the quantity of shares bid for by said prospective investor and the value determined by subtracting from a total number of shares being offered said total number of shares bid for above said clearing price; and dividing said product by a sum of the number of shares bid for at said clearing price.

7. The computer implemented method of claim 1, wherein said steps of offering to accept bids for equity shares and receiving bids from potential purchasers of the offered shares are performed through a World Wide Web based interface.

8. The computer implemented method of claim 1, wherein said potential purchasers are registered with a designated underwriter.

9. The computer implemented method of claim 1, wherein said potential purchasers are either institutional investors or retail investors.

10. The computer implemented method of claim 9, wherein said retail investors participate as bidders via an on-line brokerage firm.

11. The computer implemented method of claim 1, wherein said bid comprises the number of shares the potential purchaser would be willing to purchase and the price per share such potential purchaser would be willing to pay.

12. The computer implemented method of claim 1, wherein said clearing price is equal to the offering price of said equity securities.

13. The computer implemented method of claim 1, wherein said bids are binding contracts.

14. The computer implemented method of claim 1, wherein said bids are indications of interest.

15. The computer implemented method of claim 1, further comprising the step of preparing auction reports summarizing information relating to bids and share allocation results.

16. The computer implemented method of claim 1, wherein said step of receiving bids from potential purchasers of the offered shares comprises receiving bids from broker dealers.

17. The computer implemented method of claim 16, wherein said bids received from broker dealers were submitted to a broker dealer open order system by users and treated as good until cancelled limit orders.

18. A system for determining the price and allocation of equity securities of a company over the World Wide Web comprising: a user input terminal where qualified potential purchasers submit bids for equity shares; and a computer system connected to said user input terminal via a communications network; wherein the computer system is configured to: provide information about an offering to accept bids for equity shares to at least one qualified potential purchaser and at least one non-qualified potential purchaser; accept bids only from one or more qualified potential purchasers via the communications network, wherein at least one non-qualified potential purchaser submits a bid through a qualified potential purchaser; receive said bids only from qualified potential purchasers, determine a clearing price based upon the received bids; allocate to prospective investors who bid a price above the clearing price all of the shares for which they bid; allocate to prospective investors who bid a price equal to the clearing price a pro-rata allocation of the shares for which they bid; and allocate zero shares to prospective investors who bid a price below the clearing price.

19. The system of claim 18, wherein said computer system comprises: an auction server for processing said bids to determine said clearing price and the number of allocated equity shares to each prospective investor; an auction database for storing deal information concerning an auction transaction; and an account information computer for storing and managing prospective inventor account information.

20. The system of claim 19, wherein the computer system is configured to limit the total number of shares that may be sold to any one prospective investor.

21. The system of claim 19, wherein prior to said auction server processing said bids, said bids are associated with prospective investor account information from said account information computer and information concerning an auction from said auction database.

22. The system of claim 19, wherein said deal information comprises the symbol to be used to designate the company.

23. The system of claim 19, wherein said deal information comprises the price range for the deal.

24. The system of claim 19, wherein said deal information comprises the number of shares expected to be sold.

25. The system of claim 19, wherein said deal information comprises the expected opening and closing dates of the deal.

26. The system of claim 19, wherein said deal information comprises a limitation on the number of shares that a prospective investor may purchase.

27. The system of claim 19, wherein said deal information is also stored on said account information computer and auction server.

28. The system of claim 18, further comprising a research information server which provides information concerning an offering.

29. The system of claim 28, wherein said information comprises the full text of a prospectus that describes the proposed offering.

30. The system of claim 18, wherein limits are placed on bids submitted by certain prospective investors.

31. A computer implemented system for determining the price and allocation of equity securities of a company comprising: an order management server component for: providing information about an offering to accept bids for equity shares to at least one qualified potential purchaser and at least one non-qualified potential purchaser; offering to accept bids only from one or more qualified potential purchasers via a communication network, wherein at least one non-qualified potential purchaser submits a bid through a qualified potential purchaser; and receiving via a communication network bids only from qualified potential purchasers of offered equity securities; an auctioneer component for determining a clearing price for offered shares based on the received bids, allocating to prospective investors who bid a price above the clearing price all of the shares for which they bid, allocating to prospective investors who bid a price equal to the clearing price a pro-rata allocation of the shares for which they bid, and allocating zero shares to prospective investors who bid a price below the clearing price; and a data storage component for storing information associated with bids.

32. The system of claim 31, wherein said bids are received from said broker dealers.

33. The system of claim 31, wherein the bids received from broker dealers are submitted via a broker client module that interfaces with an order management system at the broker dealer.

34. The system of claim 31, wherein said data storage component stores information on users and user security information relating to user access rights to the system.

35. The computer implemented method of claim 1 wherein one of the one or more qualified potential purchasers comprises a financial institution, an on-line brokerage firm, an investment advisor, a certified financial planner, a certified financial advisor, or an insurance company.

36. The computer implemented method of claim 1, wherein: at least one of the one or more qualified potential purchasers comprises a qualified institutional investor, and at least one other of the one or more qualified potential purchasers comprises a qualified non-institutional investor, further comprising: permitting the extension of credit for a bid only to qualified institutional investors; and requiring qualified non-institutional investors to have funds in an account sufficient to cover a bid.

37. The computer implemented method of claim 1 wherein information about the offering comprises one or more of a prospectus, a description of the offering, auction guidelines and rules, instructions on how to open a brokerage account, marketing materials associated with the offering, a registration form, or a disclaimer.

38. The computer implemented method of claim 1 wherein at least one non-qualified potential purchaser submits a bid through a qualified potential purchaser that is an on-line brokerage firm.

39. The computer system of claim 18 wherein one of the one or more qualified potential purchaser comprises a financial institution, an on-line brokerage firm, an investment advisor, a certified financial planner, a certified financial advisor, or an insurance company.

40. The computer system of claim 18 wherein: at least one of the one or more qualified potential purchasers comprises a qualified institutional investor, and at least one other of the one or more qualified potential purchasers comprises a qualified non-institutional investor, the computer system further configured to: permit the extension of credit for a bid only to qualified institutional investors; and require qualified non-institutional investors to have funds in an account sufficient to cover a bid.

41. The computer system of claim 18 wherein information about the offering comprises one or more of a prospectus, a description of the offering, auction guidelines and rules, instructions on how to open a brokerage account, marketing materials associated with the offering, a registration form, or a disclaimer.

42. The computer system of claim 18 wherein at least one non-qualified potential purchaser submits a bid thorough a qualified potential purchaser that is an on-line brokerage firm.

43. The computer system of claim 31 wherein: at least one of the one or more qualified potential purchasers comprises a qualified institutional investor, and at least one other of the one or more qualified potential purchasers comprises a qualified non-institutional investor, the order management server component further configured to: permit the extension of credit for a bid only to qualified institutional investors; and require qualified non-institutional investors to have funds in an account sufficient to cover a bid.

44. The computer system of claim 31 wherein at least one non-qualified potential purchaser submits a bid thorough a qualified potential purchaser that is an on-line brokerage firm.

Description Submit all comments and votes

SUMMARY OF THE INVENTION

In one aspect, the invention provides an auction system and method used in concert with an underwriting process. By re-thinking accepted underwriting practices, the new system and process levels the playing field for pricing and allocating equity securities. Unlike the traditional method of allowing entities such as investment bankers to negotiate the offering price, an auction system and process in accordance with the invention, employs a mathematical model that lets the market set a share price that is optimal for both the company and the purchasers of shares of stock in the company. The result is a price that eliminates traditional fixed discounts and better reflects what the market is truly willing to pay for the stock.

One embodiment of the invention provides a system and method for determining the final offering price and allocations of stock in a company. First, an underwriter sets an initial price range for the shares. Then, any investor (whether institutional or retail) who is interested in the offering can place a bid in the auction through an internet website. Once the auction is closed, the auction system calculates a fair market clearing priced based loosely on a mathematical model created by Nobel Prize-winning economist William Vickrey. In effect, a software-driven auction engine ranks bids from highest price to lowest price. Starting with the highest priced bid, the amount of shares requested accumulate. At the price where the cumulative amount of requested shares is equal to the amount of shares the company wishes to sell, the clearing price is set. Everyone who bids above the clearing price receives a full allocation. Those who bid at the clearing price receive a partial allocation, while those who bid below the clearing price receive no shares. The result: shares are allocated in a more evenhanded way at a price determined not by negotiation behind closed doors but by institutional and retail investors bidding on equal footing based on the actual per share price they are willing to pay.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is an illustrative system level diagram of a transaction server in accordance with a presently preferred embodiment of the invention.

FIGS. 2A and 2B are pictorial illustrations of the process of opening a brokerage account in accordance with a presently preferred embodiment of the invention.

FIGS. 3A and 3B are pictorial illustrations of the process of setting up a "deal" for the underwriting of securities in accordance with a presently preferred embodiment of the invention.

FIGS. 4A and 4B are pictorial illustrations of the process of closing a "deal" for the underwriting of securities in accordance with a presently preferred embodiment of the invention.

FIG. 5 is a pictorial illustration of the process of post-execution clean-up after a "deal" has been completed in accordance with a presently preferred embodiment of the invention.

FIG. 6 is an illustrative drawing of tables that define the database schema on the transaction server of FIG. 1.

FIG. 7 is an illustrative architecture level drawing of the Auction Server of FIG. 1.

FIG. 8 is a generalized block diagram of a physical network that implements auction system FIG. 1.

FIG. 9 is an illustrative flow diagram of the process of creating, modifying or cancelling an auction transaction using the auction server database schema.

FIG. 10 is an illustrative flow diagram of the process of closing and executing an auction transaction using the Auction Server database schema.

FIG. 11 is an illustrative flow diagram of the process of creating, modifying and cancelling bids in a bid table using the auction server database schema.

FIGS. 12A and 12B are illustrative flow diagrams of possible User interaction with a transaction server and auction server of a present embodiment.

FIG. 13 is an illustrative flow diagram of an order settlement process in accordance with a present embodiment of the invention.

FIG. 14 is an illustrative flow diagram of a pricing and allocation algorithm in accordance with a presently preferred embodiment of the invention.

OVERVIEW

An Auction Pricing Mechanism in accordance with the invention is a method of price determination for capital formation that can result in substantial benefits for companies seeking to raise capital through the sale of equity into the public market. An equity offering employing an auction in accordance with a present embodiment of the invention differs substantially from traditional underwritten public offerings in which underwriters employ a "book building" sales technique. In a "book building" process, the price at which shares are sold is determined by negotiation. A lead underwriter represents an offering company to investors and the investors to the offering company in the negotiation. In offerings conducted by auction in accordance with the invention, equity will generally be sold directly to the public by an offering company at a price determined by investors bidding for shares. Bids may be subject to a minimum price or range set by the offering company. An may serve as the Auction Advisor, and may provide a system upon which the auction is run and assists the offering company in marketing the offering and running the auction. Offerings conducted by such auction process may be run on the basis of a specific number of shares to be sold or amount of capital to be raised.

An equity offering auction in accordance with the invention provides a number of significant advantages over a traditional underwritten offering. Foremost, such auction provides a logical and precise method of determining valuation based upon market demand rather than the "book building" process. In the traditional "book building" process, companies are encouraged to "leave something on the table" in order to fill the underwriter's order book. In an auction in accordance with the invention, the offering can be more readily priced at the maximum valuation that the market can bear. In addition, due to the manner in which shares in such auction are allocated (see below), shares may be placed with those seeking long-term investment rather than the ability to "flip" the stock. This differs significantly from the traditional underwritten offering where shares are often placed with the underwriter's best customers who expect to have the ability to quickly sell those shares for a profit due to the discount on valuation that is typically built into the initial public offering price. In an auction in accordance with the invention, this discount can be readily eliminated and therefore, investors have no short-term incentive to sell their holdings. The auction system also can provide greater exposure to the retail market as individual investors have the ability to bid on offerings. This may have the effect of increasing demand over that of typical underwritten offering where the retail market is largely ignored relative to institutional buyers. Finally, due to the relatively low cost structure of the Underwriter, and the automation of the offering process, companies utilizing the auction process should be able to realize significant savings over the underwriting discounts charged in typical offerings as well as avoid unnecessary dilution by utilizing the auction to raise smaller amounts of capital than typically required by underwriters in traditional offerings.

How The Auction Mechanism Works

Offerings utilizing an auction in accordance with the invention will be conducted through the use of a software system developed. This system will handle multiple aspects of the offering process, including subscription, pricing and allocation.

Subscription

Equity offering transactions conducted by auction will be available to both institutional and retail investors. In order to participate in any given offering investors must be registered with a designated Underwriter. It is expected that institutional investors will be able to register directly with such Underwriter, but that retail investors will typically participate via on-line brokerage firms. On the day the shares become available for sale by the offering company registered investors can submit bids on the offering electronically through a web-based interface maintained by the Underwriter, as the Auction Advisor. Any investor making a bid will indicate the number of shares such investor would be willing to purchase ("Bid Quantity") and the price per share such investor would be willing to pay ("Bid Price"). No bid will be considered valid until immediately available funds in an amount equal to the total dollar value of such investor's bid are deposited into an escrow account established in connection with the offering. On the last day which the shares are available for sale by the offering company to investors, the offering company will stop accepting bids after the close of trading on the New York Stock Exchange (the "Auction Close").

Pricing

The price at which the offered stock is sold to investors will be determined following the Auction Close. All valid bids received by the offering company will be arranged by price in descending order. An accounting firm unaffiliated with the offering company (the "Auction Auditor") will, starting from the bid with the highest price and working downward, sum up the bid quantities (the "Rolling Accumulation"). At the bid price at which Rolling Accumulation surpasses the quantity of securities being offered (the "Aggregate Securities"), the Auction Auditor will establish such price as the price at which all investors whose bids are included in the Rolling Accumulation will be allocated shares (the "Clearing Price").

It will be appreciated that the pricing may be conducted by a computer software algorithm that has access to (prospective) investor bids.

Allocation

All investors whose bids are included in the Rolling Accumulation will be allocated shares. An investor whose bid price is above the Clearing Price will be allocated such investor's entire Bid Quantity (a "Full Allocation").

An investor whose bid price equals the Clearing Price will be allocated a fraction of its Bid Quantity (a "Pro Rata Allocation"). The Pro Rata Allocation will be the product of such investor's Bid Quantity and the Aggregate Securities less the sum of the Bid Quantities above the Clearing Price divided by the sum of the Bid Quantities at the Clearing Price, as represented by the formula below: ##EQU1##

Any Pro Rata Allocation that results in the allocation of a fraction of a share will be rounded down to the nearest whole number. The additional shares made available due to the rounding mechanism (the "Additional Shares") will be allocated to the investor at the Clearing Price whose bid contained the highest Bid Quantity.

Example of Allocation of 100 share offer at $16 a Share Rolling Bid Price Quantity Accumulation Allocation $20 10 10 10 19 10 0 10 18 20 40 20 17 30 70 30 16 40 110 30.sub.(1) 15.sub.(2) 50 150 100 160 .sub.(1) Each investor at $16 a Share receives 75% of his Bid Quantity .sub.(2) Investors at $15 a Share will receive no allocation

Closing Shares will be delivered to investors whose bids are accepted in the auction process four days following the Auction Close (the "Closing Date"). In addition, on the Closing Date the proceeds from the offering will be released from escrow and the fee payable to the Auction Advisor will be paid.

The Auction Advisor As Auction Advisor, the Underwriter will assist the offering company in structuring and marketing its offering as well as provide the system upon which the auction can be conducted. Structuring the offering includes activities such as preparing a red herring statement and a prospectus for example. As a fee for its services as Auction Advisor, the Underwriter will typically charge a fee equal to approximately 3-5% of the aggregate proceeds of the offering. The terms and conditions of the Underwriter's role as Auction Advisor generally will be set forth in a Placement Agency Agreement by and between the offering company and the Underwriter. The Placement Agency Agreement generally provides, among other things, for the offering company to make certain representations and warranties to the Underwriter as Auction Advisor and that the offering company will indemnify the Auction Advisor against certain liabilities, including liabilities under the Securities Act of 1933, as amended.

Example of Equity Auction Process 1 Underwriter signs a non-binding letter of intent with a prospective issuer of securities. The language of the letter of intent will be substantially the same as is customarily employed by other firm commitment underwriters in the industry. 2 The issuer will file a registration statement. The underwriting arrangements will be clearly described in the relevant sections of the registration statement, including without limitation the Plan of Distribution section of the prospectus therein, and such arrangements will be consistent with the information set forth in this letter. 3 After the registration statement is filed and electronic and printed preliminary prospectuses become available, the Underwriter may begin accepting indications of interest from investors. 4 Prior to effectiveness, Underwriter shall represent to the satisfaction of NASD Regulation ("NASD") that sufficient capital will be available to Underwriter to meet the minimum net capital requirements for an open contractual commitment under SEC Rule 15c31, and obtain a statement expressing "no objections" to the distribution arrangements. The prospective net capital charge will be based on the high end of the range set forth in the "Calculation of Registration Fee" table in the effective registration statement, plus 20% of the maximum aggregate offering price, and be offset as firm bids are accepted. Upon approval of an acceleration request under SEC Rule 461, the offering will become effective with a price range under SEC Rule 430A. At this time, Underwriter will post the Rule 430A prospectus on its website. 5 After effectiveness, provided Underwriter has demonstrated to NASD's satisfaction that it has sufficient net capital to meet the prospective net capital charge described in paragraph 4, Underwriter No. 1 will open the auction for offers to purchase. Such offers to purchase may be received until the close of the auction. All offers to purchase are revocable until the close of the auction. 6 After effectiveness, Underwriter will confirm whether pre-effective indications of interest received by Underwriter are firm bids, and will notify selected dealers participating in the auction that they may solicit firm bids and instruct them to confirm which pre-effective indications of interest received by them are firm bids. All such firm bids also are revocable until the close of the auction. Underwriter will advise pre-effective bidders in person, by email, telephone, voicemail, facsimile, mail and/or posting a notice on its website that the registration statement is effective and that the prospectus is available at the website, and request that the pre-effective bidders confirm that their pre-effective indications of interest are firm bids. In cases of verbal notice the advice may be that the prospectus will be posted on the website if it has not yet been posted. (Bidders may consent to electronic prospectus delivery by e-mail or posting on the website in their account agreements.) All pre-effective bidders who have not furnished an email address will be notified in person, by telephone, voicemail, facsimile or mail. Underwriter also may state in the message or in a subsequent message that if pre-effective bidders do not respond by a certain time, their bids will be deemed withdrawn. All indications of interest that are not confirmed prior to the close of the auction shall be deemed withdrawn. The time to confirm that indications of interest are firm bids may vary depending on the facts and circumstances of the particular offering. 7 The auction will close not earlier than on a publicly disclosed date for the close of the auction. Upon close of the auction Underwriter will determine the clearing price based on 100% of the offered shares, excluding any shares covered by an overallotment option. 8 Immediately after the close of the auction, the lead Underwriter and any other underwriters will enter into a standard firm commitment underwriting agreement with the issuer to purchase 100% of the underwritten shares at a negotiated price based on the clearing price but at a discount from the public offering price. Although the lead Underwriter expects that the public offering price generally will be the clearing price, the actual public offering price may be at or below the clearing price. Concurrently with execution of the underwriting agreement, the lead Underwriter will take the appropriate net capital charge under SEC Rule 15c31 for an open contractual commitment based on 100% of the shares underwritten by Underwriter No. 1 at the public offering price. [It will be appreciated that the Underwriter's net capital charge may be reduced by contractual commitments, if any, by selected dealers to purchase the shares from Underwriter. In such cases, Underwriter will notify such dealers that they must take the appropriate net capital charge for the securities for which they have so committed.] 9 After the Underwriter signs the underwriting agreement with the issuer, Underwriter will communicate its acceptance at the public offering price of firm bids placed at or above the clearing price for the number of shares bid except that bids at the clearing price may be prorated based on the number bid at that price. In addition, as will be described in the prospectuses for IPO offerings, Underwriter has the right to accept certain large bids in part and limit the allocation of securities with respect to such large bids if Underwriter believes such partial allocation is necessary to facilitate a reasonable public distribution of the shares available in the offering. Underwriter also reserved the right to reject bids that it deems manipulative, disruptive or which it deems necessary or beneficial to facilitate the orderly completion of the offering, and the right, in exceptional circumstances, to alter the method of allocation a sit deems necessary to effect a fair and orderly distribution of the offered shares. Communication of acceptance will be in the manner set forth in paragraph 6. Underwriter will post the Rule 424(b) prospectus on its website in place of the Rule 430A prospectus as soon as practicable after setting the public offering price. Underwriter's clearing firm will send confirmations to bidders whose offers to purchase are accepted. All electronic delivery methods will be in conformance with SEC interpretations of use of electronic media for delivery, particularly as stated by the SEC in Release Nos. 337233 (Oct. 6, 1995) and 337288 (May 9, 1996). Underwriter will deliver hard copy of the prospectus to its customers who have advised Underwriter that they do not have an email address or internet access. 10 Funds will be transferred from the brokerage accounts of all successful bidders to the clearing agent in accordance with the usual and customary procedures for settlement in accordance with Rule 15C61. At settlement, the clearing agent will pay to the issuer an amount equal to the aggregate offering price for 100% of the underwritten securities, plus the aggregate exercise price of any securities purchased by Underwriter upon the exercise of any overallotment provision, less the underwriting spread. Underwriter's obligation to purchase such securities at settlement is not contingent on the performance of the selected dealers or investors. An "Example Plan of Distribution" is attached as "Addendum A" which is incorporated herein by this reference.

Overview of Auction System A typical user of an Auction System is a General Investor--retail investor, institutional investor, or money manager--who buys equity offerings (IPO's, secondary offerings, insurance demutualizations, debt offerings, and other capital formation processes. The User ordinarily will access the Auction System through a brokerage account. In the Preferred Embodiment, the Introducing Broker, which holds the brokerage account, provides communications facilities for users to enter bids from their brokerage accounts into the Auction System, to modify or cancel these bids, to review the status of these bids, to track the history of the bids, and, finally, to determine what bids were successful and ultimately filled. Through the Brokerage Account or through an independent information source (which, in the Preferred Embodiment is a web site), the user will have access to a Prospectus or other description of the offering and other information content, such as on-line roadshows. The User will reach his/her brokerage account via the Internet, which provides a broad base of distribution. In a preferred embodiment, the brokerage account is on-line, but access to the Auction System can also be provided via the telephone, automated voice recognition systems, mail systems, or any means that allows the Typical User to reach a brokerage account. In the Preferred Embodiment, Users will submit their bids to the Auction System electronically via an on-line brokerage account. Users will indicate the particular security (typically by entering the company name or ticker symbol), the number of shares they wish to purchase, and the price they are willing to pay. In the Preferred Embodiment, bids submitted via an on-line system will be interpreted by the brokerage transaction system as GTC (good-until-cancelled Limit Orders) orders. In the Preferred Embodiment, bids submitted via an on-line system will be routed via the brokerage Order Management System to an Auction Server. In the Preferred Embodiment, the Auction Server will collect and store all bids submitted for all offerings. In the Preferred Embodiment, at the end of an Auction Period, the Auction Server will conduct an auction on the submitted bids for a particular offering via an auction algorithm. In the Preferred Embodiment, the algorithm is of a general type of algorithm sometimes referred to as a Vickery Auction (also sometimes referred to as a Dutch Auction), whereby all bids are ranked from highest price to lowest price and a prescribed price (called the clearing price) at which a prescribed amount of offered shares can be sold is determined. In a present embodiment, the prescribed price is the highest price at which all offered shares can be sold, and the prescribed amount of shares is, of course, all of the offered shares. Moreover, in a preferred embodiment, all bids above the clearing price are filled and all bids at the clearing price are filled on a pro-rata basis, though any number of variations of the basic algorithm could be employed consistent with the invention. In the Preferred Embodiment, filled orders (executions) are routed back to the Order Management System of an Introducing Broker, who then routes the fills to the individual accounts of successful users. In the Preferred Embodiment, clearing and settlement of executions are handled according to SEC and NASD requirements by the clearing agents.

Conducting an Auction One purpose of a system in accordance with the invention is to allow wide and fair participation by both institutions and individuals in the pricing and allocation of public offerings of stocks. Another purpose is to place the stock in the hands of long-term investors. Yet another purpose is to provide a cheaper mechanism to raise capital for companies seeking liquidity that will not cause undue dilution of pre-offering shareholders.

Market Segmentation and User Profiles In a current embodiment, the market for an offering using an Auction System in accordance with the invention is segmented into two groups. Although this segmentation is not essential to practice of the invention. The first group includes retail investors: individual investors who trade for their own accounts. An important sub-segment are those individuals who maintain accounts with electronic brokerage firms and have a high degree of comfort with the Internet and obtaining information there. Awareness of a particular auction can result, for example, from promotions directed at the company's customer base (especially in the case of branded consumer goods) as well as marketing through an Underwriter's brokerage partners (e.g. hot-button links to an Auction System Web site from an on-line brokerage partner's own Web site). As described below, nonqualified individual investors can enter bids through a broker, who would gain a reallowance on the trade and ensure there is sufficient funding in the brokerage account to cover the transaction. Individuals without brokerage accounts can be directed to one of the Underwriter's brokerage partners. The second group includes professional money managers and institutional investors. Some professional investors may wish to route bids through their brokerage accounts via telephone or dedicated terminals while others may wish to enter bids directly over the Internet and settle transactions through an existing account. For direct bidders, the Auction system may require a mechanism to ensure that there are sufficient funds in the account to settle the transaction. Partnerships with brokerage houses that have a large installed base of dedicated terminals could provide interesting marketing opportunities for offerings as well as a means to ensure secure and valid bids.

Typical Process Flow The Auction System handles two classes of investors (qualified and nonqualified investors). Only qualified investors will be able to place bids during the auction to minimize the possibility of prank bids and defaults on payment. Qualified investors will generally include institutions, a group of on-line brokerage firms partnered with an Underwriter, certified financial advisors who manage multiple accounts, and other groups subject to SEC or NASDAQ oversight. Alternatively, a Qualified Investor may be defined according to NASDAQ's definition of an Institutional Investor, which belongs to one of the following categories: (a) banks, savings and loan associations, insurance companies, or registered investment companies; (b) investment advisors registered under Section 203 of the Investors Advisers Act of 1940; (c) any other entity--whether a natural person, corporation, partnership, or otherwise -with total assets of at least $50 million.) A non-qualified investor who does not have an account through a qualified investor can participate by opening an account with one of the designated on-line brokerage firms. Any investor, however, will be able to view equity offering information at the auction Web site. In a present embodiment, investors without Internet access will be able to order offering information and establish brokerage accounts through a voice-response system that will be maintained by brokerage firms partnered with the Underwriter. Typical content includes a short description of the company and its business, pricing "guidance" from Underwriter No. 1, a prospectus, a description of the offering, auction guidelines and rules, instructions on how to open a brokerage account (with hot links), road-show materials, registration forms, disclaimers, etc. Investors should have Internet-connected client computers equipped with Web type software browsers to review offering-related materials posted at the auction Web site. In addition, qualified investors who wish to submit bids directly via the Internet should have software installed to send and receive secure e-mails and documents. As noted above, investors without on-line access will be able to obtain documents and open brokerage accounts to participate in the auction through a voice-response system. The process steps outlined below apply to on-line investors and qualified investors. Investors open the auction Web site by pointing to the appropriate URL. Access to the site requires registration. This ensures that the system captures information about all investors with potential interest in the stock. A password may be required at this level to verify e-mail address. Registered investors can review and print pricing "guidance," a prospectus summary, the entire prospectus, etc. Road-show materials may be subject to restrictions and not available for printing. Video or audio recordings of road-show appearances, which can be streamed over the Internet, may be provided in order to provide access to management briefings and responses to questions. The prospectus may be available on floppy disk or CD; printed versions may be offered to investors who make requests via the touch-tone telephone system. An Auction Order Handler enters registration information into an account database and initiates an audit trail (a privacy policy can be clearly stated on the web site). Qualified investors who will be submitting bids must also register at the bid site and provide information that identifies them as a qualified bidder (e.g. SEC registration numbers, appropriate membership numbers, institutional identifiers, account information, etc.). They also may be required to send via secure e-mail with digital signature a message that confirms their bid registration. Bidder cinoyters may be equipped with an agreed-upon security system for sending and receiving encrypted messages. For individual investors, a third-party Certificate Authority may be required in order to validate a bidder's digital signature and to send a confirmation notice to the Auction System. Potential bidders may be required to register digital signatures with the Certificate Authority prior to auction. Alternatively, individual investors may be required to submit bids through brokerage accounts rather than employ digital signatures, the use of a brokerage account and the safeguards ordinarily associated with such may provide adequate authentication of individual investor bids. Upon validation of a bidder, the Auction Server may send via secure e-mail, a confirmation with password and auction number. An auction Order Handler updates accounts database and audit trail. Bidder registration closes prior to auction. When an auction period opens, qualified investors may submit bids. Bid sheets on a Web page can be accessed only with a password. Bidders may use passwords to access their account data and cancel bids. Bid traffic may be encrypted. An Auction Server sends confirmation of bid (preferably via secure e-mail). An Auction Order Handler updates accounts database and audit trail. An Auction Engine updates bid stack for each valid bid. At close of the bidding period, an Auction Engine runs an auction algorithm and determines pricing. An Auction Order Handler determines allocation, reports results to issuer company, and updates accounts database and audit trail. An Outside Auditor may be employed to review auction results. The issuer company accepts or rejects auction results. An Auction Server reports results to bidders and Clearing Agent (preferably via secure e-mail) and requests payment. Clearing Agent completes auction transactions.

Content of Web Site Web pages include following information: Auction title (legal name of company). Short description of company and its business with hot links to: Pricing "Guidance." Prospectus summary. Full text of Prospectus. Auction rules. Offering information: Number of shares offered. Minimum accepted bid price. Size of bid lots (can submit lots with different prices). Bid registration period. Bidder qualifications. Name of Certificate Authority and instructions for registering digital signature. Name of Clearing Agent Methods for providing payment and when payment is due. Disclaimers. Registration form and instructions. Bid registration form and instructions. Road-show materials FAQ's. Presentation. Threaded discussion. Updates. Streaming video/audio (see IPO.com). Database design. Note: Complete description of fields will be provided later. Documents Database: Accessible by Auction Web Server Contains large text files, such as: Pricing "Guidance." Prospectus materials. Company background. Auction results. Etc. Multimedia files. Search engine. Accounts Database: Accessible by Auction Order Handler. Contains registration materials and audit trail, which documents actions taken by users and user-related actions taken by Auction Server and Auction Order Handler.

Algorithms Pricing (based on number of shares offered). Order all valid bids by price in descending order. Starting from the Bid with the highest price and working in descending order, sum up the number of shares bid to determine the Rolling Accumulation. The offering price is the bid price at which the Rolling Accumulation passes the number of shares offered. Pricing (based on capital raised). Order all valid bids by price in descending order. Starting from the Bid with the highest price and working in descending order, sum up the number of shares bid to determine the Rolling Accumulation. The offering price is the bid price at which the Rolling Accumulation multiplied by that bid price surpasses the target capital amount.

Allocation All investors with bid prices included in the Rolling Accumulation will be allocated shares. Investors with bid prices above the offering price will be allocated their entire bid quantity. Investors with bid prices equal to the offering price will be allocated a fraction of their bid quantity according to a formula to be defined later.

Transaction Server Components Referring to the illustrative system diagram of FIG. 1, there is shown an illustrative system level drawing of a transaction server 100 in accordance with a presently preferred embodiment of the invention. In operation, a user may access a wide area communications network such as the internet 102 through a user terminal 104. The terminal 104 may be a personal computer or any device that provides interactive access to the communications network. The user may access an internet Research Information Server 106 by entering the appropriate URL for the Information Server. The Research Information Server 106 provides information concerning an offering. For example, it may provide a full text of a prospectus that describes the proposed offering and may provide an explanation of the rules that will be followed in conducting the offering. These rules may include the rules whereby equity shares in the offering are auctioned on-line over the internet, for example. The user terminal 104 also may communicate with the transaction server 100 through the communications network, such as the internet 102. The user enters a URL corresponding to the transaction server 100 in order to establish a communications link with the transaction server. A firewall 108 provides security between the transaction server 100 and the internet 102. In a presently preferred embodiment, there are load balancing mechanisms, identified as Hydra Web-1110-1 and Hydra Web-2110-2 that are used for load balancing and fault tolerance. Basically, the transaction server, in a present embodiment, comprises a pool of web servers (only two shown) Web transaction server 103-1 and Web transaction server 103-2 are operationally disposed behind the firewall 108. The Hydra Web-1110-1 and Hydra Web-2110-2 serve to balance the load of connections between the multiple web servers (only two shown) 103-1, 103-2 that make up the transaction server