French auctions are types of uniform-price auctions that are often used in crafting the structure of initial public offerings on stock options in the nation of France. The essential process of the French auction is to set what is known as a minimum or reserve price for each share that is made available as part of the offering. Bids are then collected from investors, and the data is used to negotiate 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 actual practice, the bids that are collected as part of the French auction approach are sealed. This means they are not disclosed to any third parties at the time they are submitted. It is only when the firm that announced the IPO uses the data in order to set minimum and maximum prices 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. Generally, any bids that are above the maximum price agreed upon by the firm and the regulator are eliminated, and bidders pay the minimum price, with the shares awarded using a pro rata approach. This means the shares are awarded on a proportional basis, using the original bids and the shares requested by each bidder as a guide.
In some instances, the response to the French auction may generate an extremely high demand for the shares offered as part of the IPO. When this is the case, the strategy of fixing a minimum and maximum price may be discarded. In this scenario, the initial public offering is shifted to a fixed-price offering strategy, and the bidders are offered the shares at that fixed rate per share, once 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 shares as part of an initial public offering is employed in a number of nations around the world. The use of this auction model is controlled by regulatory agencies in the nations where the process is recognized and approved by those agencies. In some cases, a firm may not be eligible to use the French auction model, based on criteria that is established by the governing regulatory agency. In general, brokers and others who help craft initial public offerings will know if this type of auction format is viable for the firm that creating the IPO in question.
