Don't Believe the Hype: The SEC Still Disses the Average Investor

A recent Schwab deal offers roadshow access to a few investors -- very few.
Publish date:

Washington, D.C., of all places, rarely moves in Internet time. And yet, not four weeks after Silicon Babylon

criticized the

Securities and Exchange Commission

for excluding retail investors from initial public offering roadshows, it seemed to budge.

Charles Schwab

, the nation's largest online broker, was handed a "no action" letter from the SEC in mid-November, giving Schwab permission to use the Internet to broadcast roadshows. On its face, this seemed to be victory for the little guy, finally letting online investors into the secretive world of roadshows. Understanding the growing interest in roadshows is simple: It's the key to understanding an IPO. And the IPO is the hottest investment in the market.

Tell Me More
Surging IPOs foment interest in Internet roadshows

Percentage gains for the year. Source: IPO Monitor.

Despite the celebratory headlines that accompanied this news, there is little cause for popping corks. Upon further review (as they say in the


), it appears that the SEC is holding investors short of the goal line. The bulk of online investors will still be prohibited from seeing roadshows. The new service will be accessible only to the rich -- high-net-worth investors and their country-club ilk. Indeed, the Schwab move illuminates the selective disclosure that the SEC's roadshow rules encourage. And it has launched a battle, with upstart investment bank

Wit Capital


taking on Schwab and asking for more permissive regulations from the SEC.

Roadshows, for those new to the fight, are the private meetings that soon-to-be public companies hold for potential investors. CEOs fly to New York, San Francisco, Los Angeles -- anywhere professional money managers gather -- to hype their wares. But these presentations are highly restricted by the SEC. Companies are required to hand a copy of their prospectus, or "red herring," to each person who enters the room. The comments and slides are supposed to adhere tightly to the information in the red herring. And attendance is strictly limited to clients of the investment banks -- professional money managers. That gives those nabob investors a privileged, government-sanctioned edge over the average Joe.

"I go to a lot of roadshows," says Ryan Jacob, manager of the

Jacob Internet

fund. "It's time-consuming, but if you talk to any money manager, you hear management is one of the most important investment criteria. In the Internet space, it's much more so. They can't talk about things that are not in the prospectus, but there are definitely other nuances. You see their priorities, where they think their niche is heading, broader comments about the industry that give you a big picture. Roadshows give the opportunity for management to make their case and give me a level of comfort that I can have confidence in their abilities."

In short, this is valuable information. And while the SEC feigns interest in leveling the playing field for all investors, the weak, underfunded agency has little juice or perhaps inclination to make changes that will actually affect the millions of online investors. At Schwab, only "Signature Gold" customers -- a fraction of the firm's 6.3 million total customer base -- can attend the online roadshows. These privileged investors must be frequent traders, with at least a half a million dollars in Schwab accounts.

The SEC still believes, clearly, that there is some information that the average investor just can't handle. It admits that the Schwab letter is the mildest of steps. "A no-action letter is the just that," says Brian Lane, the outgoing head of the SEC's division of corporation finance. "It's the least comfort you can give someone. It means the staff won't refer the matter to the division of enforcement, but it's not a policy change."

The laws governing IPOs don't currently allow for the existence of the Net, only written communication. "Companies are limited to communicating what's in the prospectus," says Lane. "If the Internet is perceived as a writing, then it's not a prospectus and it's not allowed."

This represents the agency at its paternalistic worst. "Unsophisticated investors seeing the roadshow might be swayed by the roadshow rather than the prospectus," says Lane, who will turn his division over to Washington lawyer David Martin. "I think the commission is grappling with this."

The commission won't have to wait for the


Thursday Night SmackDown

for that grapple. Wit is about to challenge the SEC to expand online roadshow privileges by applying for a no-action letter of its own.

The problem, says Wit's co-CEO Ronald Readmond, is the hopelessly outdated

Securities Act of 1933

. "When the SEC opined in the '30s, there was no airmail stamp, no touch-tone phone," says Readmond. "I think they need to revisit all this, and revisit suitability. Suitability is about who can afford to take this risk. That's a broader base of people than it used to be. I just hope it doesn't take 66 years for them to sort this out."

Wit Capital intends to take the SEC on. "Rather than favoring the best accounts of the house, it's our belief that any investor who is suitable to buy shares of an IPO is suitable to attend a roadshow online," says Readmond. "We want it to be broader. This isn't just for Diamond Jim accounts ... I didn't say Diamond Jim, did I?"

Readmond is wont to rip competitor Schwab (the firm was unable to provide anyone to speak about online roadshows before this article went to press). But he admits that the limited scope of Schwab's request made it easier for the commission to approve it. But now the floodgates are open.

Wit expects to get its online roadshows up and running by the first quarter of 2000. In the meantime, Schwab will get some nice PR from its online roadshows, even if no one sees them. Indeed, with online brokers planning to spend over a billion dollars on marketing and promotion over the next 18 months, it will surely give Schwab a leg up in that battle. But thus far, the SEC is showing little leg when it comes to online roadshows.

Cory Johnson files weekly from's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

For more columns by Cory Johnson, visit his column