Every investment craze has its defining moments, when participants in the mania either charge forward blithely in affirmation or violently put a halt to the festivities. The forthcoming initial public offering of

idealab!

, the Pasadena, Calif., Internet "incubator" headed by investor Bill Gross, will be one of those moments.

This IPO, filed April 20, is audacious on any number of fronts. Of the 30-odd companies in which idealab! has invested or incubated, not one can yet be considered a success by any traditional measurements. Yet idealab! already is worth nearly $8 billion, based on the private financing round it completed in March -- just before the violent correction of Nasdaq stocks.

By raising up to $300 million in an IPO, idealab! hopes to pad its prodigious cash cache. A public offering also would make a billionaire many times over of the 41-year-old Gross, who owns 41.6% of the company. (Idealab! is a family affair as well: Gross's wife, Karen, owns an additional 19.3% of the company, according to idealab!'s initial filing with the

Securities and Exchange Commission

; Gross' brother Lawrence, a vice chairman, controls another 3%, theoretically worth a piddling $240 million based on the valuation of the private placement.) Recent investors include a Who's Who of the global financial community, and Jack Welch,

General Electric's

(GE) - Get Report

longtime CEO, recently joined the board.

Idealab! is an incubator, the of-the-moment expression for firms that supply soup-to-nuts assistance to start-ups. That assistance includes funding, housing, counseling and then advice on operational issues from recruiting, accounting and legal affairs to human resources and Web site development.

Incubators -- idealab! doesn't actually use the expression to describe itself -- are extremely similar to venture capital funds but for one crucial respect. They've established themselves as holding companies. The stated reason is because that way an idealab! can keep its hand in all of the operations of its incubated companies. The companies themselves, however, are established as independent entities so, in idealab!'s words, they can "retain adaptability and entrepreneurialism."

This reminds me of the two Japanese expressions for the word "truth." One word actually means truth (

honne

). The other means what comes before (

tatemae

). What comes before is the conflict-avoiding explanation for public consumption.

The published explanation for why idealab! and others want to be holding companies -- the "guiding hand" principle -- is the tatemae. The honne, or the real reason, is that holding companies can go public and then, if the recent performance of

CMGI

(CMGI)

and

Internet Capital Group

(ICGE)

are any indication, can trade for huge premiums to the values of their assets.

Venture firms, in contrast, are considered investment companies and are subject to regulation under the Investment Act of 1940. The law, passed just before Congress took up the Lend-Lease Act to provide military assistance to Britain in World War II, gives Washington the ability to police the way professional investors manage the public's money. But it's too difficult for an investment company also to be public.

The trouble is that idealab! is a borderline case. As it spells out in its federal filing, it technically falls under the definition of an investment company but has requested an exemption from the SEC. The feds granted only a temporary exemption until July 26. No exemption, no IPO. The upshot is that avoiding regulation under the act requires idealab! (and CMGI, ICG and every other would-be publicly traded incubator) to maintain a certain threshold of ownership in each of its holdings, thus giving it operating revenue. And yet, idealab! has generated most of its revenue to date by selling securities, including a large chunk of

eToys

(ETYS)

, an idealab!-incubated company whose stock has lost much of its fizz.

By the way, idealab! is the general partner in several venture capital companies, which invest in idealab! companies and generate a management fee for idealab! for doing so. The point is that it's not as if idealab! doesn't recognize the value of the VC operating structure. It's just pursuing a different way to cash in for its trouble.

The attention on idealab! is warranted because the conventional wisdom is that it has attracted the very best and the brightest in the Internet business to its operation. Gross is widely regarded as one of the quickest minds and savviest salesmen around.

Compaq

(CPQ)

Chairman Benjamin Rosen and Jack Welch are on the board. (Here's one line you won't read in many Internet S-1 registration statements: "Since 1981, Mr. Welch has served as the chairman and chief executive officer of General Electric Company. From 1960 to 1981, he held various positions at General Electric.") Welch joined the board only last month and immediately received 1 million options to buy shares at $1.87 per share. That was at a time corporate investors, including

Dell Computer

(DELL) - Get Report

, Japan's

Hikari Tsushin

, and

T. Rowe Price

(TROW) - Get Report

pumped in $1 billion at $10 per share.

Idealab! financial statements won't be of much help to investors in evaluating the company, of course. Revenue accrues mainly from companies in which idealab! has a controlling interest. As such, the overwhelming majority of revenue comes from online auto-sales site CarsDirect.com.

The filing goes into great detail on how CarsDirect.com, which arranges for transactions between dealers and consumers, takes inventory risk and therefore deserves to book the entire value of its sales as revenue.

Whether or not that stands in light of the government's crackdown on dot-com accounting, CarsDirect.com doesn't even make a gross profit on its sales.

According to the filing, CarsDirect.com recorded $15.2 million in revenue for the year ending Jan. 31, 2000; its net revenue was a negative $4.3 million. Idealab!'s overall revenue was $21 million, while cost of revenue was $28 million. Never mind sales and marketing expenses of $70 million. If investors are hungry for idealab!'s IPO, we'll know the silly season isn't over.

Incidentally, CEO Gross knows how to protect himself in his venture. The company has lent him $30.7 million, enough to cover his most recent purchase of 3 million shares of idealab! stock at $10 per share. Funny Gross wouldn't put his own money at risk. Within the last year, he bought 20 million shares at 3.5

cents

each. Remember who's hurting and who isn't if this stock swoons once it's out of the gate.

Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.