FOOL ON THE HILL
An Investment Opinion
Equal Access for All Investors Yi-Hsin Chang (TMF Puck)
November 22, 1999
Last week, Charles Schwab (NYSE: SCH) announced plans to offer certain clients Internet access to company road shows for initial public offerings (IPOs). While it's good news that Schwab is moving in the right direction in terms of full disclosure to individual investors -- Schwab is the first brokerage to offer Internet road shows to retail investors -- it's unfortunate that road shows are not being opened to all investors, big or small.
The change comes after the U.S. Securities and Exchange Commission (SEC) for the first time issued a "no-action letter" that allows Schwab to offer Internet road shows to its Signature Services retail customers (roughly 20% of Schwab's 6.3 million customers) who participate in IPOs through the brokerage firm. Prior to the change, the SEC had limited the availability of Internet road shows largely to institutional investors and other "market professionals" (i.e., the Wise).
Companies going public traditionally conduct road shows in which top-level executives meet with groups of potential investors to discuss the company's plans, financials, etc. In the past few years, road shows have become available via the Internet, though the SEC had not allowed retail investors access to that information. Schwab correctly argued that road show information should be more broadly available to investors regardless of their market power, that companies should provide all potential investors equal public access to all relevant information.
While the change applies only to certain investors, Schwab should be commended for championing the rights of individual investors, for trying to democratize the process. (To be sure, given that Schwab's customers are largely retail-based, it's no doubt in the firm's best interest to get the rules changed.) It's understandable given the SEC's previous firm stance that Schwab pushed for an incremental change rather than sweeping reform. However, Schwab and other brokerage firms along with individual investors in general should press the SEC to open access to all investors.
The SEC's reasoning for limited access essentially shows a lack of faith in individual investors. The idea is that retail investors might have a harder time separating hype from facts when it comes to company road shows. Ironically, there's probably a lot more public hype out there in newspapers and on TV and the Internet preceding an IPO than what investors would get from the actual road shows. The road show presentations should provide far more rational insights than the sound bites we hear on the evening news. If the SEC is so concerned about hype, it should regulate the content of the road shows, not their audience.
Ultimately, the status quo makes individual investors second-class citizens in the world of investing. It's bad enough that institutional investors get the bulk of IPO shares due to preferential treatment plus access to closed analyst calls with management. Individual investors should at the very least be given equal access to information about the company so they can more accurately evaluate the investment potential.
Thanks to the Internet and other technological advancements, it costs companies virtually nothing to offer road shows and other information to all investors instead of just a select group. The SEC should allow companies to disseminate information to all investors, to provide full or at least broad disclosure to as many people as possible, especially given that investing in the public markets is at an all-time high.
Incidentally, I think that all too many individual investors are jumping on IPOs without adequate due diligence. Remember to read the offering prospectus and fully research the company. Also, don't follow the herd on an IPO just because you see an opening price that's significantly higher than the IPO price. The market price largely represents the short-term demand on a limited number of shares -- not necessarily the true value of the stock. Do your homework. Don't give individual investors a bad name.
The ABCs of IPOs