UPDATE 4-Groupon shares surge but concerns linger

* Shares close at $26.11, 31 percent above $20 IPO price

* Shares surge as much as 56 percent on first day

* Early exuberance driven in part by small float

* Investors concerned about business model, competition

By Clare Baldwin and Alistair Barr

NEW YORK/SAN FRANCISCO, Nov 4 (Reuters) - The shares of daily deals site Groupon Inc rose as much as 56 percent in their stock market debut on Friday, with at least some of the exuberance the result of the small number of shares sold.

The shares rose as high as $31.14, or 55.7 percent above the IPO price, in early trading on the Nasdaq, at one point pushing the market value of the company to $19.9 billion. The shares later eased to close at $26.11, 31 percent above their $20 IPO price, giving the company a market value of about $16.7 billion.

Groupon had the third-highest trading volume on the Nasdaq on Friday, with nearly 50 million trades.

Groupon sells Internet coupons for everything from spa treatments to nose jobs and is one of this year's most closely watched IPOs.

The offering, one of the largest in recent years, may be a barometer of investor appetite for IPOs. A strong first few trading days could help other private Internet companies -- such as Angie's List, Zynga and even Facebook -- pursue their own IPOs.

There is a huge backlog of companies that filed to go public earlier this year. Most put their plans on hold when the stock market slumped in August. Groupon is the first major IPO since then.

Chief Executive Andrew Mason and Chairman Eric Lefkofsky hugged in Times Square after ringing the opening bell on the Nasdaq. Employees at company headquarters in Chicago donned lime green T-shirts emblazoned with the company's ticker symbol "GRPN" printed in old, ticker-tape-style lettering.

The company declined Reuters' requests for interviews. One employee in Chicago, who declined to give his name, said workers had been discouraged from speaking to the media. Several uniformed security guards walked the perimeter of the building, keeping an eye on Groupon workers who came outside on their cigarette breaks.

All of the shares sold in the IPO were new, which means early equity holders may sell a portion of their stake next spring, once the 6-month lock-up period expires. It also means that, for now, Andrew Mason's newly-minted $1.2 billion remains paper wealth.

Some analysts and investors warn that Groupon's early surge could be a short-term phenomenon and its shares could reverse course and trade down like those of Internet radio station Pandora Media Inc .

There are still lingering questions about Groupon's business model and about competition from better-funded rivals such as Amazon.com Inc and Google Inc .

Groupon has lost two chief operating officers in the past year and had to adjust its accounting twice under regulatory pressure.

"They wanted to have a decent pop on the stock so they didn't take that much public," said David Berman, a consumer technology and retail specialist at hedge fund firm Durban Capital. "They created demand by limiting supply, and they got the pop."

Michael Yoshikami head of money-management firm YCMNET Investment Committee, agreed.

"Much of this pop is based on low float. We continue to be concerned about Groupon's model, especially given the low barrier for entry into this space. But it's a familiar name and investors tend to gravitate to familiar names at first," he said.

On Thursday, Groupon upsized its IPO and sold 35 million shares for $20 each. But that stake amounts to only about 5 percent of the company.

The $700 million raised was on the larger side for a U.S. IPO, but the 5.5 percent represented the second-smallest share float in the United States in the past decade, according to capital markets data provider Ipreo.

Groupon was founded in October 2008 and has never been profitable. In the nine months ended Sept. 30, it posted a net loss attributable to common stockholders of $308.1 million on revenue of $1.1 billion.

A spokeswoman for Deutsche Boerse AG's International Securities Exchange said it expects to list options on Groupon on Nov. 14, with other major exchanges expected to follow suit. Options can be used to bet on the direction of stocks, including a decline. They are often used by traders to hedge stock positions.

Underwriters on the IPO were led by Morgan Stanley, Goldman Sachs and Credit Suisse.