The First IPO You Can Invest in Before Wall Street

On January 8th, Banco Santander (NYSE: SAN  ) filed to take its subsidiary Santander Consumer USA public. Today, it begins trading. This IPO is bound to whet some appetites after the awesome IPO year we just had. In 2013, 29 IPOs doubled after going public, with six of these companies doubling in the very first day of trading. Unfortunately, you had to either be a bigwig or filthy stinkin' rich to get in on the action. 


Last week there was an ad floating around online promising regular ol' investors like you and me the opportunity to invest in Santander's IPO before it trades on the open market, completely free. Is this promise too good to be true?

What's in it for Banco Santander?
Before we talk about how average Joes can buy an IPO for free, let's talk about Banco Santander's motivation for taking its U.S. subsidiary public in the first place.

Companies go public -- begin trading stock on the stock exchanges -- to raise money. Simply put, companies sell investors a piece of ownership in the company. Banco Santander's situation is a tad unique. It owns dozens of subsidiary banks around the world, and in an effort to maximize its capital raising potential, it's taking its largest subsidiaries public. In 2009, it took Banco Santander Brasil (NYSE: BSBR  ) public, and Santander Mexico (NYSE: BSMX  ) in 2012. 

These IPOs netted $6.8 billion and $4.3 billion respectively, and strengthened Banco Santander's -- the parent company -- financial position. But Banco Santander still retains majority ownership in these two subsidiaries, allowing it to continue reaping the gains from Brazil's and Mexico's growing economies. 

While raising capital is the primary motivation to take its subsidiaries public, creating brand awareness is also a factor. Consider that 80% of Santander Mexico's shares were offered on the New York Stock Exchange, while the remaining 20% were listed on the Bolsa Mexicana de Valores -- Mexico's stock exchange. Banco Santander Brasil also lists locally in Brazil. This allows both companies to gain a local following and, hopefully, more business.

The Santander IPO ad you've seen is in reference to its subsidiary Santander Consumer USA. Like other Santander IPOs, this is to raise capital and brand awareness. And Santander believes it can best accomplish both of these goals by partnering with Loyal3 to bring the IPO to you.

What's in it for Loyal3?
Loyal3's mantra is "making stock ownership easy and fee-free for everyone." The platform is indeed extremely easy to use. You don't see charts or financial jargon on its website, just the names and logos of the 54 companies available to invest in. Simply click and enter the amount you want to invest. There are no fees, commissions, or fine-print clauses associated with buying or selling. All the money you invest goes to buying stock. And it really is for anyone -- anyone with at least $10 to spare. Pretty cool, right?

But Loyal3 is a business, and it has to make money somehow. Rather than charging investors fees to buy and sell, it has opted to charge the companies that are being invested in. Loyal3 claims that customer-investors spend 54% more than just regular customers, and refer their friends 107% more. Therefore, it behooves these companies to pay Loyal3 to turn ordinary people into investors and loyal customers. 

Banco Santander has decided to take its U.S. branch public with Loyal3. You're seeing the ad because Loyal3 has to get your attention if it's going to turn you into a loyal customer-investor. It's extremely uncommon to see an advertisement for an IPO. Typically, average investors cannot get shares until they are available to trade, therefore, an ad targeting average investors would be a complete waste. But this is a very different IPO.

In addition to charging companies to turn customers into investors, Loyal3 also charges companies for these IPOs. The benefit cited by Loyal3 is that an IPO available to the general public will create more small-stake investors rather than large instutional and megarich holders. This can create better market stability and leaves more decision-making power with the companies themselves. But I believe an unmentioned benefit is also being exploited.

A couple of months ago, Twitter (NYSE: TWTR  )  was priced at $26/share, raising the company $1.8 billion. But when shares hit the open market, they quickly jumped to $45/share and spiked up to nearly $75/share a month later. Apparently, there was quite a demand from average investors on the market. Had Twitter sold its IPO to these average investors directly instead of just extremely wealthy and institutional investors, it could have raised $3-$4.5 billion. 

To sum it up, Loyal3 is a business, and Banco Santander is its customer. Loyal3 must satisfy this customer by delivering on its promise to create many small-stake loyal shareholders/customers. Therefore, Loyal3 needs to advertise the IPO to average investors to make sure we get in.

What's in it for us?
Imagine holding Potbelly or Noodles & Company when they both doubled in their first day of trading. Finally, a sure-fire way to get rich quick. Not so fast...

Yes, IPOs are quite successful these days, but don't expect that huge surge in share price with Santander's IPO. IPOs are rising so quickly because many people that wanted in on these IPOs weren't able to buy until they debuted on Wall Street. This time around, anyone who wants in can get in -- the demand simply won't be there post-IPO. In the long run, Santander Consumer USA could still be a good investment, it just won't see the initial spectacular returns in stock price.

What is truly concerning about the Loyal3/Santander arrangement is how easy it will be for people to invest. Now, I'm obviously all for investing, and I don't have a problem with things being simple, but this arrangement opens the door for many investors with unrealistic expectations, who don't really know the first thing about investing.

When Facebook (NASDAQ: FB  ) went public, myriad people who had never invested before wanted in. Fool Eric Bleeker reported receiving an email from a would-be investor wanting to invest $40,000 in Facebook's IPO. The only hiccup was this person didn't even know how to buy stock. That's dangerous.

Another concerning feature of Loyal3's platform is the ability to invest via credit card. This jibes with the platform's ease of use, as credit cards are extremely convenient online. But this opens the doors for the financially irresponsible to invest money they don't have in the hope their investment soars.

Fortunately, Santander won't create the pandemonium that Facebook did. It's not a household name like Facebook, and Loyal3 has a monthly $2,500 per stock investing limit to prevent someone from loosing their shirt in a bad investment. But with the amount of fortune seekers online today, I believe the real need is not for easier investing, but for better investing education. 

To all would-be investors
When it comes down to it, the normal rules of investing apply here. Don't invest because you clicked on an intriguing ad or watched a flashy video. And definitely don't invest the kitchen sink hoping to hit a first-day home run. Only invest if you understand and love the business. If you're new to investing and want to know more, I highly recommend you start where I did, with the Motley Fool's 13 steps to investing.

If you do have experience in investing, Loyal3 might not be a bad way to go. With no fees, it could be a particularly effective platform for investing with a dollar-cost averaging method -- investing a set amount at regular intervals.

And finally as far as Santander Consumer USA's IPO goes, be sure to check out the prospectus, and -- should you decide to plop down your hard-earned cash -- be mentally prepared for the bumpy ride that typically goes with IPOs.

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Read/Post Comments (9) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 23, 2014, at 12:08 PM, Biloxi8 wrote:

    Invest in a bank? Not a good idea. After all you may be worth more than the bank. These Zombie type of banks have more liabilities than assets. Their net worth is minus many millions. Facebook is a scam. It may not be around in a few years. When they go belly up, they may try to sell your pictures which became their property when you signed up with FB.

    It will be a nasty bankruptcy!

  • Report this Comment On January 23, 2014, at 12:21 PM, thequast wrote:

    We must each find investments that fit our style and risk tolerance level. Thanks for weighing in with your opinion, though I would have to respectfully disagree with calling all banks "zombies" and predicting the impending bankruptcy of Facebook. But even if I'm wrong, at least my pictures are safe, since they're so dull no one would buy them anyways...

    Back on point, any thoughts on investing in other companies through the Loyal3 platform?

  • Report this Comment On January 23, 2014, at 2:33 PM, Biloxi8 wrote:

    Well, Sandander's non performing loans doubled annually since 2010. 36,000 non paying customers, what could that be worth? 36 billion euros worth of debt? Not so zombie, just a semi-zombie bank. FB 87% of revenue is advertising. Just like newsweek magazine until they shut is down.

    Hey, don't give your money to these companies. Invest in yourself!

  • Report this Comment On January 23, 2014, at 2:39 PM, TMFBlacknGold wrote:


    Actually, Boston Beer held an IPO by attaching flyers to cases of beer. That was back in 1996. But this is a cool story nonetheless. Thanks for sharing!


  • Report this Comment On January 23, 2014, at 3:03 PM, thequast wrote:


    Thanks for sharing man. Wow, what a crazy way to do an IPO. Thanks for reading

  • Report this Comment On January 23, 2014, at 3:44 PM, Biloxi8 wrote:

    From Economist

    Credit corpses (Banks)

    The fear, especially in peripheral economies, is a repeat of Japan’s experience in the 1990s, when “zombie” banks staggered along for years, neither healthy enough to lend to firms nor weak enough to collapse. There are the same unvital signs in Europe. The average price-to-book ratio for European banks remains below one, suggesting that investors think lenders are worth more dead than alive.

  • Report this Comment On January 23, 2014, at 4:05 PM, thequast wrote:


    Thanks for adding that last comment. It helps me understand what you mean by zombie bank.

    Would you mind elaborating on what you mean by "invest in yourself"? It's an interesting statement and I wonder what you envision a self-investment looking like.

  • Report this Comment On January 23, 2014, at 4:37 PM, Biloxi8 wrote:

    Use the money to learn a new trade. Start a new enterprise! A small business perhaps. Take a course in design, paralegal, nursing or any profession where there is a shortage of skilled workers.I know people who started with a few thousand dollars. You might lose some of it but that way YOU control it. I assure you that YOUR money is safer with YOU than with any stockbroker or bank. That is a less risky investment than giving it to somebody else to GAMBLE it away.

  • Report this Comment On January 23, 2014, at 6:34 PM, thequast wrote:


    I think we can find a lot of common ground with what you're saying. Turning from investing in the stock market to provide yourself a better chance to succeed in the workplace is always a fantastic choice, and should be considered part of a larger plan of getting yourself on solid financial footing in life.

    Yet, I wouldn't consider investing pure gambling. My 2008 investment in Buffalo Wild Wings was for me a no-brain investment in a great business at an even better price. There's many better-than-gambling opportunities on Wall Street. (The only mistake I made was selling for no good reason.)

    I think we can also find common ground on you controlling your own money. That's part of our mission here at the Motley Fool. Rather than trust a broker to give you good picks, when they may or may not have your best interest in mind, we try to equip people with knowledge so they can make their own informed investing decisions.

    Thanks so much for taking the time to answer my questions. Foolish best.

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Jon Quast

I've been a contributor with the Motley Fool since 2012. My love of good food keeps me mostly analyzing the restaurant sector. But I'll jump into any sector when I see a shining value opportunity.

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