CurrentOfferings.com Story:

Sharing The Wealth

By Susan Kitchens, Forbes, March 30, 2004

During the last IPO boom, the average newly listed stock gained 70% in the first 180 days. This year's most anticipated offerings include real estate services firm CB Richard Ellis, online jeweler Blue Nile and electronic stock exchange Archipelago.

While clients of underwriters and brokerage houses usually have the advantage for early entry, the U.S. Securities and Exchange Commission is trying to make it easier for average retail investors to participate in "hot issue" listings.

Late last year the SEC approved a new rule proposed by NASD to essentially level the playing field among retail investors, investment banks that underwrite IPOs and the brokerage houses that distribute them. Called Rule 2790, it went into effect March 23.

Up until now, retail investors have rarely shared in the early-wealth creation of new public offerings. Part of the reason was because insiders--think former Credit Suisse First Boston investment banker Frank Quattrone--allegedly allocated shares to clients and others at IPO prices. When the stock market went through the roof, these so-called "restricted persons," or those people related to the transaction, benefited, while the retail investor, often with no inside connections, stood little chance of cashing in on the gains. Not to mention the companies that got left out in the cold from billions of dollars left on the table.

A previous rule, called the Free Riding and Withholding Interpretation, barred anyone affiliated with the IPO issuer to participate in the IPO if it became a "hot issue." Now, says Ben A. Plotkin, chief executive officer of Ryan Beck & Co., a New Jersey-based investment bank, these "restricted persons" are excluded from all IPOs, not just the "hot issue" ones. "Retail investors have long been at a disadvantage when it comes to investing in IPOs," says Plotkin. "This rule should help put everyone on more equal footing."

Plotkin recommends that those with brokerage accounts who are interested in participating in forthcoming IPOs fill out the paperwork as soon as possible through their broker. (Generally, it's expected that brokerages will forward the documentation to their clients.) Ryan Beck underwrote Bakers Footwear Group (nasdaq: BKRS - news - people ), up 60% since it listed in February.

Even without a brokerage account at an underwriter, you can still access the IPO market through discount brokerages such as E*Trade (nyse: ET - news - people ), HarrisDirect, a unit of Bank of Montreal (nyse: BMO - news - people ), and Charles Schwab (nyse: SCH - news - people ), though you generally must have a sizable account with them. At HarrisDirect, for instance, you must maintain a minimum account size of $100,000. In most cases, you will be asked to fill out additional forms to qualify for investing in often-volatile IPOs. In general, each company's Web site provides information about upcoming IPOs in which investors may participate.

Still, many IPO market watchers recommend avoiding trying to get in too early. "I would not get in within a month of the IPO, because there is too much excitement, generally," says Tom Taulli, a professor of finance at the University of Southern California and author of Investing in IPOs. A long-awaited listing, he says, can "become too frothy." Investors hyped up Ctrip.com (nasdaq: CTRP - news - people ), an online Chinese travel agency, which popped up to $43 within a week of its listing in December. The share price has since fallen to $28.

If you're willing to take a gamble on IPOs, another way to play is through a mutual fund, the IPO Plus Aftermarket fund, a division of Greenwich, Conn.-based Renaissance Capital. The fund invests in common stocks of IPOs at the offering price and then in the aftermarket, or trading on the IPO after the listing. Some stocks that fund founder Linda Killian likes: Carter's (nyse: CRI - news - people ), marketer of baby and young children's apparel, up 11% since its October 2003 listing; auto insurer Direct General (nasdaq: DRCT - news - people ), up 6% since August; auto mechanic training company Universal Technical Institute (nyse: UTI - news - people ), up 26% since it listed in December; and biotech stock Eyetech Pharmaceuticals (nasdaq: EYET - news - people ), which is developing a drug to prevent vision loss in collaboration with Pfizer (nyse: PFE - news - people ). It is up 55% since it listed in January.

But these big runups generally don't last. For a long-term investor, it may not be the wisest financial move. Unless you have a big appetite for risk, you may be better off waiting until the IPO market cools--or adding a few growth stocks when valuations are reasonable.