French auctions establish a minimum price for shares in an IPO, with bids collected and used to negotiate prices with the market regulator. Bids are sealed and shares are allocated on a pro-rata basis, with a fixed price bidding strategy used if demand is high. This approach is used in other countries and regulated by government agencies.
French auctions are types of uniform price auctions that are often used to carry out the structure of initial public offerings on stock options in the nation of France. The essential process of the French auction is to establish what is known as a minimum or reserve price for each share that is made available as part of the offer. Bids are then collected from investors and the data is used to negotiate the minimum and maximum prices for the shares with the market regulator. In France, the regulator that the company offering the IPO works with is known as the Societe des Bourses Francaises, or simply as the SBF.
In practice, the bids that are collected under the French auction approach are sealed. This means that they are not disclosed to third parties at the time of their submission. It is only when the IPO-announcing firm uses the data to set price floors and price ceilings that the information is provided to the market regulator. After reviewing the data, the market regulator works with the firm to set the price range that will apply to the IPO. In general, any offers that exceed the maximum price agreed by the firm and the regulator are eliminated and the bidders pay the minimum price, with the shares allocated in a pro-rata approach. This means that shares are awarded on a pro rata basis, using the original bids and shares requested by each bidder as a guide.
In some cases, the response to the French auction could generate extremely high demand for the shares offered under the IPO. In this case, the strategy of setting a minimum and maximum price can be discarded. In this scenario, the initial public offering is shifted to a fixed price bidding strategy and the bidders are offered the shares at that fixed per-share rate, again using a pro-rata approach to determine the number of shares offered to each bidder.
While referred to as a French auction, this approach to offering stock as part of an initial public offering is employed in several nations around the world. The use of this auction model is controlled by the regulatory agencies of countries where the process is recognized and approved by those agencies. In some cases, a business may not be eligible to use the French auction model, based on criteria set by the government regulatory agency. In general, brokers and others who help create initial public offerings will know if this type of auction format is viable for the firm creating the IPO in question.
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