IPO investing -- especially when it comes to the hottest offerings -- has historically been the realm of institutions and wealthy investors. However, we recently learned that two fintech disruptors plan to bring IPO investing to their millions of customers. In this Fool Live video clip, recorded on March 29, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why this could be such a big deal for both companies, and for investors as a whole.
Jason Moser: Matt, SoFi and Robinhood recently just announced here that they're coming up with a platform that will offer investors the ability to invest in IPOs. For folks wondering what do you mean exactly by that, I mean I can invest in IPO as well. You can invest in a company when it goes public and it starts trading on the open market. But often times, you're not going to get in on that IPO price. You're going to be as an individual investor, you're going to get in there after the pop, and oftentimes that means a lot of money is left on the table. But it looks like SoFi and Robinhood are trying to crack that nut, so to speak, in giving individual investors more the opportunity to get in there on those IPOs and really benefit from these companies going public. Let's talk a little bit about this because it's traditionally an opportunity, it's only been available for, call it what it is, folks with a lot of money. It seems like a really neat idea. I can't really say that I see a whole heck of a lot of downside, but I'm a little conflicted. I feel like I trust SoFi more than I trust Robinhood at this point. Am I misguided there?
Matt Frankel: We'll talk about the products in just a second, but first to your point, let me tell you why this is so important.
Frankel: I guess arguably the biggest IPO to happen in the past year would be Airbnb. You could argue that, but I'd say that's one of the biggest.
Frankel: Airbnb went public, they set their IPO price at $68 a share. So that's what institutional investors, that's what Goldman Sachs (GS -0.43%) sold shares for their clients for, as you put it, the rich, I certainly didn't get into the Airbnb (ABNB -3.91%) IPO.
Moser: Nor did I.
Frankel: All the investment banking clients paid $68 a share. You know what the lowest price on the open market Airbnb has traded for in the time since it's IPO?
Moser: I feel like it's $90, I'm just spitballing $90.
Frankel: $121.50. That's the cheapest anybody like you and me would have been able to pay for, and that's if we timed it perfectly. Almost double. That's why this is so important. There's a real, let's call it an imbalance in the IPO market toward rich investors.
Frankel: I will talk more about SoFi's platform because they gave more details than Robinhood did.
Frankel: Again, I'd prefer SoFi to Robinhood, I'm a SoFi customer, this might get me to be a SoFi best customer.
Frankel: SoFi is going to actually become an underwriter of these IPOs, like Goldman Sachs is, like Fidelity is, like the big investment banks are.
Frankel: Now, a lot of investment banks are underwriters, like Bank of America (BAC -0.28%) is commonly an underwriter on a lot of these big IPOs. But that doesn't mean they sell their shares to anyone who wants them.
Frankel: They usually go to the rich. SoFi wants to be an underwriter like these other investment banks are, but they want to sell them to anybody. They've already sent out an email to their clients about this. I got a SoFi email about the subject. They're offering this to any clients with over $3,000 in their investment accounts. Not necessarily that you want to put $3,000 into an IPO, $3,000 total in assets in your accounts.
Frankel: But they're opening this up pretty widely. The CEO, I don't know if you're familiar with this, CEO Anthony Noto of SoFi.
Moser: Yeah, absolutely.
Frankel: He was formerly head of Tech Media and Telecom at Goldman Sachs.
Frankel: He actually presided over the Twitter (TWTR -1.02%) IPO.
Moser: Yeah. Well, to your point, I think he was also the CEO at Twitter, I believe but even more so he was the CFO, I think of the NFL, wouldn't he?
Frankel: Yeah. He has a big IPO background.
Frankel: Very impressive resume. We can spend the whole show talking about what he has done in the past and stuff like that.
Frankel: But at Goldman he supervised over 50 IPOs himself, so he gets this process. That's what makes me really confident because he wouldn't be promising this if he could deliver.
Frankel: Robinhood said they want to create a similar platform. They actually announced it first to be fair.
Frankel: Robinhood said they were going to bring IPOs to the masters first. It's unclear whether they actually want to become an underwriter or whether they want to work out some deal to get access to shares early, something like that. They did say they want to curve out a block of their own shares when they go public to sell to their own clients, not uncommon, Coinbase said something similar. Airbnb actually did give their hosts a way to get it on the IPO, so that's not too uncommon. But just opening up general IPOs to the masses because I use TD Ameritrade, I think you said you do too.
Frankel: They offer some IPOs. But if I'm being honest, it's never the ones that I really want to get into. It will be like some random like small healthcare company that I've never heard of that they offer some shares. It's not Airbnb, it's not DoorDash (DASH -5.27%), it's not even really the high profile SPACs that I would want to get into that they offer public. Being able to really have my pick of IPOs, that could be a reason to move over to SoFi. But at the same time, like we saw on Robinhood started commission-free investing. Now, when's the last time you paid a commission to trade a stock?
Moser: Yeah. It feels like it's been forever. In reality, it's been a year I guess, but that was a nice move.
Frankel: There was a big ripple effect through the industry and I could see something similar happening here. If enough customers leave like the TD Ameritrades and Merrill Edge and Schwabs (SCHW 0.03%) and all those to go to SoFi because they're offering IPOs, how long before they figure out, hey, we shouldn't just sell these shares to the rich customers, maybe we should sell them to whoever wants them.