Not Everyone Eligible to Join Google IPO
Thursday, August 12th 2004, 12:48 pm
By: News On 6
NEW YORK (AP) _ I've been participating in the run-up to Google Inc.'s widely publicized initial public stock offering, or IPO, to give people insight into how the company's auction process works. It's been billed as an IPO for the average investor, circumventing the Wall Street insiders to give the little guy a shot at getting pre-market shares of the hottest IPO of the 21st century.
It hasn't worked out that way, at least for me. According to my broker, I'm not eligible to participate in the Google auction. The underwriters' definition of ``average investor'' for this IPO apparently includes above-average knowledge, experience and money. At best, I have two out of three.
I'm willing to bet that many people who were hoping to get in on Google will likewise be disappointed, since it's been little publicized that brokers will have the final say on who can participate. It takes more than simply opening a trading account.
After opening my Ameritrade account and obtaining my Google bidder ID number last week, I wanted to research the company. Google has targeted its shares at between $108 and $135 each, but it's up to me as an investor to determine what I think the company is worth so I can place an informed bid.
After reading the prospectus, I searched online for professional research on the stock. I didn't find much, sadly, though Standard & Poor's researchers believe its value to be around $121 to $127.
I wanted more. I logged into my Ameritrade account, since the online brokerage provides research links for its customers. I clicked on the IPO Center and, unlike last week, found it was open for business.
There was only one IPO there _ Google _ so I clicked on that and an eligibility questionnaire popped up. I was a little confused at first, but then recalled a couple of lines buried in the 211-page prospectus saying that each individual underwriter would have to determine a bidder's eligibility to participate in the IPO.
The first 11 questions were fairly standard, as required by Securities and Exchange Commission regulations. No, I'm not an officer, director, partner or employee of a broker-dealer or bank, and neither is anyone in my family. I have no fiduciary responsibilities to an underwriter or a public company. I'm not an executive or board member of a public company, and do not own large chunks of any such company.
The next six questions were more intriguing.
_ ``Am I aware that investing in a new issue is speculative, and is only appropriate for certain customers?'' That makes sense. Yes.
_ ``What is your investment experience?'' Ethically, I can't put money into individual stocks since I cover Wall Street. However, I've been a business journalist since 1998 and have covered a wide variety of publicly held companies, so I chose 5-7 years from the menu _ the second highest option available.
_ ``What is your investment knowledge?'' The most knowledgeable option was ``broker-dealer,'' but that's not me. ``Extensive'' seemed most appropriate.
_ ``What is your liquid net worth excluding your residence (cash, stocks, etc.)?'' I answered truthfully and, thankfully, did not have to enter the option with the least amount of money. My answer was the second lowest of four choices, however.
_ ``Do your investment objectives include speculative investments?'' Considering I opened this account specifically to bid on Google, I answered yes.
_ ``Do you assume full responsibility for your investing decisions?'' Yes.
I clicked ``Submit.''
The next page that popped up had the headline ``Not Eligible.'' It went on to say:
``We regret that based upon the responses you provided in the questionnaire, we find you are ineligible to participate in this offering. Determination of eligibility is based upon certain regulatory requirements as well as Ameritrade's eligibility requirements. Ameritrade evaluates your eligibility based on your financial information as well as your experience, knowledge and investment objectives. We cannot provide specific details regarding the responses required.''
The ``Not Eligible'' page offered a number to call, so I did. I wanted to know exactly what made me ineligible. While the people at Ameritrade were exceedingly nice, they would not tell me why I was booted _ company policy.
According to the SEC, no brokerage firm can guarantee anybody's participation in an IPO. The SEC also allows individual brokerage firms to set their own individual criteria for anyone seeking to get in on an IPO. If the brokerage firm thinks you can't afford it, then you won't get in.
I've talked to a number of underwriters over the past few days. Due to the stringent regulatory requirements surrounding any IPO, all of them would only talk to me as long as I didn't identify them by name or by firm. I think the information was worth it, though.
Each underwriter makes its own determination as to which customers can and cannot participate in the Google IPO. It doesn't matter whether you want to buy five shares, the minimum amount allowed in the auction, or 5,000 shares _ they don't even ask. What matters is that you have the experience, know-how and funds to handle this kind of speculative investment. In my case, for example, I'm pretty sure my liquid net assets weren't up to snuff, despite my experience and knowledge. If I had a ton of money and no experience, however, I might not have gotten in either.
The questionnaires _ all the underwriters I talked to are using them _ are weighted toward each underwriter's eligibility requirements. One underwriter may put more weight on net assets, while another might give experience and knowledge greater weight. None of the underwriters I talked to tells customers up front what the requirements are, since that might make it tempting for investors to lie.
Google has billed its IPO as a way for everyday people to get in on the process, denying Wall Street the usual stranglehold it's had on IPOs. Public bidding, a minimum of just five shares, an open process with 28 underwriters _ all this pointed to a new level of public participation.
I think Google's executives had their hearts in the right place. But the individual underwriters have to protect themselves, and their customers, from highly speculative investments. The SEC has rules against selling unsuitable investments to brokerage customers, and more than a few disgruntled investors have sued their brokers, claiming they didn't understand the risks involved. So I don't blame Ameritrade, either.
Instead, I think there's been a lack of communication between Google, its underwriters and the general public _ surprising given the amount of material they've put out there. Aside from a few fine-print lines in the prospectus and on the brokers' sites, little mention has been made regarding the eligibility requirements. And there's absolutely no sense of what those requirements might be.
Think of the number of accounts have been opened by bidders hoping to get in on Google who, in the end, won't qualify. But that's the way the IPO process works. It's really NOT for everybody, despite what Google would have us believe.
So what am I going to do now? I can still use my Google bidder ID with another broker, so I'm pulling my money out of Ameritrade and plan to open an E-Trade account. I'll still answer E-Trade's questionnaire truthfully, and wouldn't recommend that anybody fudge their answers simply to get in on Google _ you could get in serious legal trouble doing that.
If I still can't get in, I'll tell the stories of other investors who are eligible to bid. After all, this is still a unique IPO and, if successful, could indeed change the way companies offer their stock.
How much change, exactly, remains to be seen.