North Carolina businessman Bob Griffeth recalls the last time he was cut in on an initial public offering: about three years ago. A broker offered him 200 shares, which he bought and quickly sold for a profit. Like thousands of people across the country, Griffeth says he'd love to buy more IPO shares, but doesn't hold much hope. "It sure would be nice," he says, "but I don't think it's available." That, however, may be about to change.
A torrent of hype hails a new era in individual investing. Companies ranging from E*Trade to Wit Capital claim that the rules are changing, that hot stock issues aren't just for institutional investors anymore -- that soon there can be an IPO in every portfolio.
Room for small investors
But are IPOs really opening up to the masses? Certainly, a growing number of maverick companies -- including both IPO candidates and the investment banks that serve them -- are making initial shares more accessible to small investors.
IPO candidate TheStreet.com, for instance, is giving as many as 5,000 subscribers to its news service the opportunity to buy up to 100 shares each. Populist broker Charles Schwab, meanwhile, is giving its clients a shot at more and more IPOs: 18 different issues in 1997, 27 last year and 11 in the first quarter of 1999 alone.
Internet banker Wit Capital, one of at least three new firms founded on the notion of providing individuals with the same access to deals as institutions, is itself going public, thus giving even more volume to the hype.
Truth vs. reality
And yet, many investment analysts and executives believe the rhetoric over the democratization of IPO access is far ahead of the reality -- and that it may never catch up.
While a wider range of brokerage houses are gaining access to hot shares, for example, their overall allocations tend to be small -- often tens of thousands of shares in a multimillion-share IPO, according to some investment officials.
For evidence of the closed nature of the process, one need look no further than this week's offering of Goldman Sachs, which sold most of its new shares to institutions and most of the rest to very wealthy individuals.
"It's almost an 'Alice in Wonderland' type discussion I hear in the press," says Harvard Business School finance professor Samuel Hayes. "There's no evidence that there's going to be any stock to distribute" to rank-and-file individual investors in hot deals.
Trickling down to the masses
Major investment banks resist distributions to individuals for two main reasons, explains David Menlow, president of data firm IPO Financial Network Corp. First, banks and issuing companies are afraid that small investors will quickly 'flip' their shares, destabilizing the new stock currency. Second, banks simply have found it more efficient to make a sales pitch to a finite number of 'big guys' than to a seemingly infinite number of small guys.
Unless regulations change the process, Menlow asserts, "It'll remain a game of, 'It's my ball, so you play by my rules.' "
Gail Bronson, IPO Monitor senior analyst and chief commentator, distills the current state of affairs this way: "So there is now better than the zero opportunity that there was before. ... Providing shares to individuals is good publicity, and it looks like you're doing something positive for the masses," she says. "But it's a minor slice of the overall issue [of shares]."
Even the shares that are allocated to "individual investors" through the likes of Charles Schwab don't necessarily trickle down to the masses. According to the company, to qualify for IPO shares, Schwab investors must have either a Schwab account valued at more than $500,000 or an account worth $25,000 or more generating at least 24 "commissionable" trades a year.
New breed of investment
Partly due to this pattern -- as well as the astoundingly hot and durable IPO market -- a new breed of investment bank is emerging. At least three different companies -- Wit Capital, W.R. Hambrecht & Co. and E*Offering -- are catering to corporate clients that crave a retail stockholder base.
Hambrecht's OpenIPO already raised some $10 million for the winery Ravenswood through an open auction system in which individuals had the same influence on -- and access to -- the share price as institutions. The company also is slated to help take Salon, the online magazine and community, public perhaps in June.
E*Offering founder and chief executive Walter Cruttenden believes that Internet companies have the most to gain by going public through grass-roots firms like his. The key is turning online customers into shareholders, thereby increasing their loyalty to the company's services or products. A shareholder in Amazon, the theory goes, will be the most loyal shopper at Amazon.
As a result, E*Offering -- a full service underwriter -- is busy hiring 10 different analysts, all of whom will cover Internet stocks. E*Offering, about one-quarter owned by E*Trade, started up only a couple months ago.
Share sales at E*Offering will be handled in a "round-robin" fashion, Cruttenden explains. Stock will be offered through E*Trade, which will open its sales "window" for a limited time (perhaps only 45 minutes or so). During that period, buyers can snap up whatever shares are available in specified chunks; electronically, they will take turns buying these chunks, which may be as small as 100 shares each. When all the shares are gone, the window will close.
Taking IPOs to the public
E*Offering, which is shooting to be lead underwriter in many cases, aims to make half of its allotments in IPO deals available to retail investors at E*Trade, Cruttenden says.
Business is brisk already, he says. Just 70 days into its existence, E*Offering snared a portion of an offering for the Keith Companies, an engineering and consulting company.
About a half-dozen more deals are close, Cruttenden says, and E*Offering is pitching for some 38 others.
"The Net," he says, "is moving like a monster."
But whether it's a monster that will be friendly to the masses is yet to be seen.