Unconventional IPOs
A Motley Fool Special Report

By Yi-Hsin Chang, TMF Puck

Special Feature

Part 1
What IPOs Are and Why They Happen

Part 2
How to Get In on an IPO

Part 3
New Ways Companies Are Issuing Shares

Talk About IPOs and This Special on the IPO message board

To further entice eager beaver investors, new forms of IPOs have popped up on the scene. There are the Travelzoo.com-type of IPOs, which are essentially marketing campaigns designed to draw traffic to a website (in this case, a travel-related website) by giving away free shares. According to Travelzoo.com, 700,000 people registered to be shareholders within three months. The company says it reported its first profitable quarter in the period ended September 30, 1998.

A website called exit23b gave away shares before it even had a website. Unlike the Travelzoo.com offer, where every registrant picked up a few shares, at exit23b you entered a drawing in which "10 lucky winners" got 10,000 shares each -- sounds a lot like a lottery. As of this writing, the site is still under construction, and visitors to the site are told, "We hope exit23b will be your favorite place to buy electronics, interactive gaming, music & video. In short, all things entertainment." The site launch is now slated for April -- the builders had said the site would launch in early March back in February when people were still entering the drawing.

A more legitimate new source of IPOs can be found at OpenIPO.com, the brainchild of Hambrecht & Quist (NYSE: HQ) founder and former chairman Bill Hambrecht. His new investment banking firm, W.R. Hambrecht + Co., is taking companies public by auctioning shares over the Internet. The firm's first IPO comprises 1 million shares -- a 22% stake -- in Ravenswood Winery, a highly regarded premium winemaker based in Sonoma, California, which will trade on Nasdaq under the symbol "RVWD." The "Dutch auction" opened February 8 and will close no earlier than March 22.

Since all bids are sealed in a Dutch auction, the idea is that the final IPO price should reflect what investors are truly willing to pay for the stock. The way this works is that investors participate by making a bid for what they believe the company is worth, whether it's within, above, or below the estimated pricing range -- $10.50 to $13.50 for Ravenswood. Bids can be changed or withdrawn up until the close of the auction, at which time W.R. Hambrecht will set a single offering price -- based on the bids received -- at which all shares can be sold. That means some investors may end up paying less than their bids. Those bidding below the set offering price won't get to buy any shares.

Another recently founded online investment bank is called E*OFFERING, whose website is still under construction. The bank was started by online brokerage firm E*TRADE Group (Nasdaq: EGRP); Sandy Robertson, founder and former CEO of Robertson, Stephens & Co.; and Walter Cruttenden III, former CEO and president of Cruttenden Roth. The new company plans to give E*TRADE customers greater access to public offerings and reduce underwriting fees for companies going public. E*OFFERING plans to begin underwriting offerings later this year.

The pioneer among online IPO specialists is Wit Capital, which in the past year and a half has participated in more than 50 offerings, including the IPOs of Prodigy Communications (Nasdaq: PRGY), MarketWatch.com (Nasdaq: MKTW), TicketMaster Online-CitySearch (Nasdaq: TMCS), and Ziff-Davis (NYSE: ZD). Unlike OpenIPO.com and E*OFFERING, Wit Capital doesn't act as the lead underwriter.

While it's good news for individual investors that there are now an increasing number of opportunities to get in on IPOs, keep in mind that IPOs are still highly risky investments, especially if you don't do your own research. In fact, if you view IPOs as some sort of get-rich-quick scheme, you're really better off refraining from investing in them altogether.

Whatever you do, proceed with caution.

Talk About IPOs and This Feature

IPO-related websites:

  • IPO Central
  • IPO Maven
  • IPO Monitor
  • Alert-IPO!
  • OpenIPO
  • Direct IPO

    Related articles:
  • Off the Beaten IPO Path (7/7/98)
  • The Down Side of IPOs (11/19/97)
  • Why Stock Offerings Should Make You Nervous (4/11/97)