tie-in agreement

Case Study

Initial public offerings can be a lucrative business for underwriters, especially during strong bull markets when capital-hungry companies want to tap the capital markets at the same time that individual and institutional investors are clamoring to acquire shares that are part of new stock issues. The heady days of the dot-com boom during 1998 through 2000 brought an increased level of investor demand for new common stock issues. Watching as new issues soared in price on initial trading immediately after they were brought to market caused even normally conservative investors to join the IPO mania. The huge demand for new issues apparently caused some underwriters to take advantage of the leverage they enjoyed in allocating shares among investors. Following up on investor complaints, the Securities and Exchange Commission, the regulatory unit of the National Association of Securities Dealers, and the U.S. Attorney's Office in Manhattan commenced an investigation of the allocation process in initial public offerings. In addition to charging certain underwriting firms with demanding inflated commissions or taking kickbacks, firms allegedly were also promoting tie-in agreements whereby customers who got IPO shares were required to purchase in the aftermarket additional shares of the same stock. The purpose of the tie-in was to create artificial demand to drive the price of the IPO higher in the secondary market. Tie-ins had for years been illegally used by retailers to earn extra income when particular items were in short supply. Now tie-ins were being used in initial public offerings.