Dell Opts Out of FreeMarkets' IPO

Another firm bails from an IPO at the last minute. Is the SEC cracking down on these deals?
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Call it the case of the disappearing IPO investment.




passed at the last moment on an opportunity to invest in smoking-hot appliance maker

Cobalt Networks


. The reason? The

Securities and Exchange Commission

likely imposed restrictions that didn't thrill Gateway, or generally expressed reservations that might have slowed the deal.

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Now, the powerful but murky hand of the SEC has made itself felt on another high-profile IPO, that of business-to-business auctioneer


. As reported

here a couple weeks ago,


(DELL) - Get Report

had planned to purchase up to 350,000 shares in the upcoming IPO of Pittsburgh-based FreeMarkets. Dell, along with kingpin venture capital firm

Kleiner Perkins Caufield & Byers

, was a late entrant into the FreeMarkets IPO.

Nevertheless, it seems that Dell has made an early exit. The PC maker's so-called directed-share allocation appeared in a Nov. 9 amendment to the FreeMarkets IPO. But in an amendment filed Tuesday, Dell's allotment was gone. Ditto for the brief FreeMarkets disclosure that "Dell Computer recently executed a commercial agreement with FreeMarkets." No investment, no disclosure.

What's going on here?

Well, it's not crystal clear. A spokeswoman for FreeMarkets, as well as the company's outside lawyer, Marlee Myers of

Morgan Lewis & Bockius

in Pittsburgh, declined to comment on Dell's disappearance. They cited the usual rigmarole about the filing with securities regulators speaking for itself. Duh! That's the prudent response, but frankly, this document doesn't speak for itself.

Does Dell know something other investors don't? Perhaps, but not likely. Could it be that Dell wouldn't agree to a yearlong lockup restriction the SEC might have wanted for having been given the investment so close to the IPO? Maybe. Or could it be that FreeMarkets needed to reduce the size of its directed shares, already weighing in at an amount equal to 32% of the offering? That sounds good. But even with Dell gone, the directed shares -- the 360,000 shares to existing shareholder

United Technologies

(down from 400,000 before), the 350,000 for Kleiner Perkins and the 175,000 shares for employees and directors -- are equivalent to 25% of the 3.6-million share offering. Anything greater than 10% is likely to raise eyebrows.

The reason this matters is that the SEC appears to be frowning on last-minute investments by entities affiliated with the issuing companies. Dell certainly would have been taking a risk by buying shares in a young company like FreeMarkets (which had 1998 revenue of $7.8 million). But in today's environment for Internet stocks, the risk wasn't great -- at least not if Dell could have sold the shares anytime soon.

A Dell spokeswoman had no information on why the computer maker opted out of the FreeMarkets IPO, whose lead underwriter,

Goldman Sachs

, is also an investor in FreeMarkets.

Another practice in which the SEC seems to be taking a heightened interest is the first-day, post-IPO television interview. A number of companies say they're considering not submitting themselves to a cream-puff interview the day their stock begins trading.

"I would not be surprised to see that practice wane," says Myers, the FreeMarkets lawyer, who wouldn't comment on what FreeMarkets intends to do.

Technically, there is nothing stopping companies from appearing on television immediately following their IPOs. If a company wants to disseminate written information about the stock, it must also distribute a copy of the prospectus for 25 days following the IPO. But oral communications are different. This is the same reason research analysts involved with the underwriting team wait until the 26th day to publish their research. But with the heightened attention to SEC quiet periods following online grocer



three-week postponement for being too loud, some companies -- and their lawyers -- are thinking twice.

Steven Bochner, a lawyer with

Wilson Sonsini Goodrich & Rosati

in Palo Alto, Calif., (but not the Wilson partner involved with Webvan or Cobalt Networks) says he'd frown on the quiet-period television interviews of clients, but he wouldn't stand in the way. "You need to be very careful about not saying things that are not in the prospectus," he says. "But there's so much pressure to get exposure these days."

Though some are considering taking a pass on the television interviews, more are going on the tube.

Asked if


has detected a downtick in first-day appearances, booking agent Andy Breslau says, "No, we have them on every day."

Indeed, when


(MSFT) - Get Report



(EXPE) - Get Report

went public Nov. 10, Chairman (and Microsoft CFO) Greg Maffei appeared on




. "Greg participated in those interviews that day because our CEO was having a baby," says an Expedia spokeswoman.

Expedia, for one, didn't expect the SEC to have a cow. Other companies -- like Cobalt, which kept mum -- aren't so sure.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in 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

Edie Yates assisted with the reporting of this column.