SEC Chairman Warns Investors of IPO Risks
Securities and Exchange Commission Chairman Arthur Levitt took aim at the frenzied market for initial public stock offerings during a forum in New York on Thursday, complaining that certain brokerage firms promise investors access to high-profile IPOs without properly educating them about the risk.
The practice isn’t illegal, Levitt said at the forum for investors at Columbia University, “but there are aspects of it I think are wrong.”
Some online brokerages try to tempt investors into using the firms’ trading services by offering access to these often volatile offerings.
Shares of new companies, especially Internet-related firms, have sometimes tripled and quadrupled in their first days of trading in recent years. Consequently, the few investors able to purchase the shares at the IPO price make incredible profits, a dynamic that has driven demand for IPO shares to a nearly manic level.
But those gains are often temporary. IPO stocks have proved extremely volatile and frequently fall as quickly as they rise. During most of the postwar period, IPO offerings have never been a sure thing and have often dropped dramatically in value.
The warning, however, was ignored by investors scrambling to buy shares of VA Linux Systems Inc. (LNUX). The stock opened on the Nasdaq Stock Market on Thursday at $30 a share. It shot up an eye-popping 800% to $274 by midday, then closed at $239.25. (See Page C1.)
Levitt said some investors try to take advantage of the quick run-ups in IPO stocks by selling their shares shortly after the stock starts trading, a process known as flipping. But flipping contributes to the volatility now inherent to most IPOs, and novice investors can get burned easily.
“Be careful about the new-issues game,” Levitt warned. “It’s a short-term game, and investors should be in this for the long term.”
When investing in IPOs after a stock has started trading, Levitt said investors should use so-called limit orders, which require investors to name a specific price at which they are willing to buy or sell. That way investors won’t mistakenly purchase a volatile IPO stock for far more than they had intended.
