Groupon Inc is set to price one of the year's most closely watched initial public offerings late Thursday, to strong demand for the scaled-back stock market debut of the largest daily deal company.

Chief Executive Andrew Mason and his executive team have spent almost two weeks on the road pitching to investors and addressing criticism about a replicable business model, slowing growth and accounting concerns.

The company is poised to price the IPO $1 to $2 above the current $16 to $18 range, responding to surprisingly strong demand for the biggest U.S. IPO in months, three buyside sources told Reuters on Wednesday.

To pull the deal off the company cut its valuation by about half. Existing shareholders aren't selling and only 4.7 percent of the company is being offered -- the second-smallest stake float in the past decade. It also skipped meetings with potential investors in Europe and Asia.

Solid demand for a limited supply of Groupon stock may support the IPO on its Friday debut.

One of the three investors who spoke with Reuters on Wednesday said he had placed an order for 150,000 Groupon shares, but expected to get a much smaller allocation.

Another investor who met Groupon management during the road show said late on Wednesday that he asked to buy stock in the IPO but will not be getting an allocation.

It seems very tight, the investor added.

Longer-term, Groupon shares may be volatile on concern about the company's ability to generate profits and the likelihood that existing investors will sell some of their holdings at some point.

The post-IPO investor will be taking a risk on this deal, said Josef Schuster, founder of IPO research and investment house IPOX Schuster.

It's maybe a good trade for a day trader, in and out in a single day, but I don't want to be in it for the long run, Schuster said. He added that IPOX did not ask for shares in the IPO because it has a multi-year time horizon.

FLOAT

Schuster thinks Groupon is worth $3 billion to $5 billion. If the IPO prices at $19 or $20, the company will be valued at about $12 billion or $13 billion.

A year ago, Groupon turned down a $6 billion offer from Google Inc. Earlier this year, the daily deal company began talking to bankers about an IPO that would have valued it at more than $20 billion.

By October, Groupon was planning to raise about $540 million from the IPO, down from $750 million earlier in the year.

Other Internet companies that went public this year also floated a small amount of their outstanding stock, but the floats were not as small as Groupon's 4.7 percent.

LinkedIn, a social-networking company focused on professionals, floated 8.3 percent of its shares, while Pandora Media, an online music streaming service, sold 9.2 percent of the company.

LinkedIn surged on the first day of trading in May and the stock remains far above its $45 IPO price.

Pandora shares surged initially, then slumped. Its shares traded below the $16 IPO price on Thursday at just over $15.

COMPETITION

Long term, Groupon's many competitors will likely push the money-losing company even further into the red, said one investor at a $350 million hedge fund who attended the New York roadshow but decided to pass on the IPO.

On the roadshow they say they're going to keep marketing spending relatively flat on absolute terms yet they'll get margin expansion from it but I seriously doubt it, said the investor. Competition is coming: you're going to have to spend more.

Amazon.com , the world's largest Internet retailer; Google, the biggest online search company; and American Express, a leading credit card issuer, have all launched daily deal businesses this year.

When you take a closer look, the only reason that they're generating cash flow is because they stretch out the payment terms to merchants to 60 days, the investors said. If that wasn't the case, they'd actually be burning cash.

(Reporting by Alistair Barr; Editing by Richard Chang)

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