Online IPO Opportunities Are Promising but Far From Perfect

We now have access to a few IPOs, and not the spectacular ones. But it's better than nothing.
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The market for initial public offerings is tricky. On the surface, it looks both transparent and democratic, with deal dates and offering prices announced in advance, and the performance of new issues widely covered by the financial media.

But try to actually buy into a hot IPO at the offering price and you'll find that the democratic facade is an illusion. The

StarMedias

(STRM) - Get Report

and

drkoop.coms

(KOOP)

are reserved for the big investment banks' A-list clients, who get to make quick, easy killings by flipping these stocks when they gap up on their first day of life. You and I, if we want in, have to pay the post-gap price.

It's frustrating, sure. But it's also a business opportunity for whoever can get us a piece of this action. And in the past few months, a handful of investment banks and brokerage houses have started doing just that by offering IPOs online to their clients. The response has been somewhere between enthusiastic and overwhelming, which implies that yet another wall separating individual from pro is about to crumble.

Let's keep it in perspective, though. These first-generation services are promising, but a long, long way from perfect. Each firm, for instance, can sell only those deals in which it participates. So even if you open an account with all of them, you'll still have access to only a tiny fraction of the best IPOs. Meanwhile, a limited number of shares are available for each deal, so the majority of account holders still don't get in at the offer price. And last but not least, the deals they've brought to market haven't exactly been supernovas.

But hey, it's early in the game, and a little access is better than none at all. Here's a quick look at four online IPO services:

Wit Capital

Originally a microbrewery and named after a Belgian beer,

Wit Capital

(WITC)

is staffed by Wall Street heavyweights. It is partially owned by

Goldman Sachs

(GS) - Get Report

, and it's off to a promising, high-profile start. Right now, it's offering clients a shot at six IPOs.

Wit allocates shares on a first-come, first-served basis, so paying attention and submitting a bid at just the right time are crucial. It requires $2,000 to set up an account and charges $14.95 per trade. But flippers beware: If you sell your shares too soon, you lose future IPO privileges.

E*Trade

The one household name on this list,

E*Trade

(EGRP)

, is simply adding IPOs to an already-booming retail brokerage business. It allocates shares by lottery, and according to a spokesman, has sold "30 or 40" IPOs to clients so far. The deals come from a variety of investment banks, which allocate a (usually tiny) percentage of their deals to retail outlets.

The minimum to open an account is $1,000, and commissions are $14.95. And as with Wit, customers who flip their shares are relegated to the end of the next line.

But the really big news is E*Trade's link with fledgling online investment bank

E*Offering

. Run by E*Trade's top people, along with Walter W. Cruttenden III, founder of West Coast investment bank

Cruttenden Roth

, it intends to sell 50% of each future IPO to E*Trade customers. Right now, there are four deals in the

pipeline, viewable on E*Offering's

Web site.

Friedman Billings Ramsey

Based in northern Virginia, FBR rode the Washington, D.C.-area technology boom to prominence in the late 1990s. Since May, it has offered two IPOs online:

CareerBuilder

(CBDR)

and

CAIS Internet

(CAIS)

. On June 21, it plans to price

Digital Video Express

(which will trade on the

Nasdaq

under the symbol DVDS).

FBR allocates IPO shares via lotteries, which tend to be way oversubscribed; 1,792 clients expressed interest in DVDS, for example, but only 253 were chosen. The minimum to open an account is $5,000, and commissions are $24.95 per trade.

W.R. Hambrecht

This brainchild of Bill Hambrecht, founder of small-cap investment bank

Hambrecht & Quist

, is trying to link smaller investment banks and brokers into an "Open IPO Network." As a possible solution to the supply problem, it seems to have captured the imagination of some big players:

Fidelity Investments

,

Novell

(NOVL)

,

American Century

and

News Corp.

(NWS) - Get Report

have all cut partnership deals.

Hambrecht allocates shares through a Dutch auction, in which both individuals and institutions submit sealed bids. Then it calculates a market-clearing price (above an acceptable minimum), at which all the shares get sold, and allocates the whole IPO at that price.

Hambrecht has done one issue this way, winery

Ravenswood

(RVWD)

.

Salon.com

(proposed ticker symbol: SALN) and

GreatFood.com

(GTFD) are coming, and, according to a spokesman, four others are in the pipeline. It takes $2,000 to open an account, and per-trade commissions are $19.95 (though they'll soon fall to $7.95, Hambrecht promises).

John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at

rubinoja@yahoo.com. As originally published, this story contained an error. Please see

Corrections and Clarifications.