A Public Problem : Small Investors Want Better Chance to Buy Shares in Hot IPOs


On a recent casual Friday at work, Ellie Gruenebaum looked coolly sporty in the zippered jacket by her favorite designer, Donna Karan.

But Gruenebaum was more than a bit, er, hot under the collar.

The insurance sales manager earns about $100,000 a year and spends more than $1,000 a year on Donna Karan items for her wardrobe. But when she tried to buy shares of the designer’s upcoming initial public offering, she says, the underwriters told her that institutional investors and very wealthy individuals get first crack.

“The average person with $10,000 to $20,000 to invest is locked out,” she fumes. Such frustrations by independent investors often reach fever pitch whenever the market for initial public offerings grows hot, as it is now.


“I’m just as greedy as the next person,” Gruenebaum adds, only half joking. “Why doesn’t my greed get an opportunity to express itself?”

Some small investors figure it’s time to open up the system, although experts say any major change is unlikely.

The National Council for Individual Investors, a Washington advocacy group, expects to come out with recommendations soon.

“We’re concerned that small investors are basically shut out of the IPO market,” says Gerri Detweiler, the group’s policy director. “By the time they have access to the shares, the issues have already gone public, and if it’s a hot issue, the price has gone up.”


The group is likely to seek rule changes at the Securities and Exchange Commission, which enforces securities laws, or the National Assn. of Securities Dealers, the self-regulatory organization that oversees the Nasdaq system, she says.

Of course, IPOs are not always a good deal--some, in fact, fell from the offer price their first day and never reached it again.

Market conditions are sometimes unfriendly enough to discourage IPOs--but the last few years have been a record period of issuance. Overall, history shows that small companies’ failure rates are high, thus casting doubt on the long-term prospects for many--or most--of these stocks.

Lately, IPOs are hot. A total of 13 stocks, initially priced at $5 a share or more, at least doubled in price the first day of trading last year, compared with eight for the preceding 20 years, says Jay Ritter, a visiting finance professor at the Massachusetts Institute of Technology. And the trend continues, he says.


Experts who sympathize with the small investor question whether tinkering with the rules governing the system is the best solution.

Robert Mescal, a research analyst for New Issues, a monthly newsletter on IPOs, suggests that a group such as Detweiler’s might better command a voice by amassing funds from many small investors, then approaching underwriters with requests for, say, $100,000 worth of shares.

Government securities laws are silent on the subject of how a public offering should be parceled out.

The NASD simply forbids its broker-dealer members from buying shares of a hot IPO for their own accounts.


Reid Walker, an NASD spokesman, likens the situation of the small investor to a music fan looking for a ticket to a sold-out concert. “The tickets are public, but they’re hard to get,” Walker says.

Donna Karan devotee Gruenebaum admits she was “thrilled” seven weeks ago to hear that the company, New York-based Donna Karan International Inc., planned to go public. “It’s going no place but up,” Gruenebaum thought. But when she called the major underwriters, she was told shares would go to institutions or large or active regular customers.

She said it is particularly frustrating to “an admirer and a fan.”

Spokeswomen for both underwriters refused to comment.


Proponents of the status quo--mutual fund managers among them--claim the system enables investment bankers to get advice on how to price an offering by meeting with large investors before shares go public. They also say investment bankers can get a good price on the stock being sold by the companies, reward their best customers with choice new stocks, and, while avoiding the high cost of serving a lot of small accounts, make a tidy profit.

Fredric M. Roberts, president of F.M. Roberts Co., a Los Angeles investment banking firm, says: “Institutions get allocations of IPOs because they are there for every deal. They buy on a regular basis, and they get the good ones because they participate in those that are sometimes not so good.”

Experts note that if anybody has cause to gripe when the price of a new stock skyrockets, it’s the issuing company. A jump in price can suggest that the stock was initially underpriced.

Assuming the Donna Karan offering comes to fruition, Gruenebaum intends to do what the experts say many big investors count on her and other individuals to do: buy up those Donna Karan shares in the stock market afterward.



Offers They Couldn’t Refuse

Initial public offerings have been growing fast--raising $26.4 billion in the first five months of 1996, a 180.9% increase from the $9.4 billion raised in the same period last year. Although such stocks have done very well in the 90s bull market, there are no guarantees of profit. Bars below show annualized performance over the past few years; Chart shows the 10 largest 1996 offerings and shows the percentage price change from the offering istelf--which is available mostly to institutional and favored customers--and the change from the closing price of the first day of trading.



% change, % change, Company Offer 5/31 offer 1st close price close to 5/31 to5/31 Lucent Tech. $27.00 $35.125 +40.7% +24.1 Scania 27.10 27.375 +3.4 +2.3 Assoc. 1st Cap. 29.00 37.00 +27.6 +6.5 Orange 15.62 18.00 +21.6 +7.0 Travelers/Aetna 25.00 27.625 +9.0 -0.9 CompuServe 30.00 28.50 -17.5 -25.0 Suburban Pro. 20.50 20.563 -0.6 -0.6 IPC Holdings 22.00 19.625 -6.3 -4.6 Sterling Commerce 24.00 35.00 +82.8 +51.3 Saks Holdings 25.00 32.5 +30.0 -6.1


Sources: Securities Data, Bloomberg Business News

* Through June 2