Can You Get In On the Facebook IPO?

The Facebook IPO Is Coming Soon But How Public Is It Really?

You love Facebook. You believe in it. You want a piece of it. So you want to get in on the Facebook IPO. But to do that, you have to be an “accredited investor,” meaning that your net worth needs to be above $1 million, your annual income needs to be over $200k and you must be able to certify that you have experience investing in private companies. Whew!

So you call up Facebook and prove that you are an accredited investor. Then you tell Facebook that you want to buy their stock at the pre-IPO price of $20 a share (hypothetical.) But they tell you that all the pre-IPO stock is gone. All of the stock has been sold to venture capital companies, hedge funds and other private investors.

You hang up the phone, scratching your head and think, “I’m SOL. How can that be?”

Here’s how it works for Joe Public. Your only option is to buy the stock at the IPO price and that’s only if you can get it. Remember, the Facebook IPO will simply be shares of stock for sale. Their inventory is based on supply and demand.

So you call your broker and ask him to get you Facebook stock at the IPO price (say $50 bucks hypothetically,) only to learn that the Facebook IPO was sold out and you can’t get any stock at that price either.

You hang up. Only this time, you’re frustrated because you’re beginning to realize that the term “Initial Public Offering” should really be called Initial Non-Public Offering . . .

What’s going on here? How is it that you can’t get shares of what is supposed to be an initial public offering? Where’s the public part?

This is how the game works. Investment banks take tons of companies public and they need to sell the shares to someone. Some of these companies are winners. Others are duds.

The easiest way for the banks to take companies public is to offer them to institutions like mutual funds and hedge funds because they have much more money than Joe Public. In turn, the mutual funds and hedge funds companies “put in” for almost every company the banks offer – even the not so hot IPOs. This is so that when the hot ones like the Facebook IPO come down the pike, they are assured of a hefty stock allocation and make money.

The investment banks have tried to give more stock to the public but they need large buyers like the mutual funds and hedge funds. It’s the mutual funds and hedge funds institutions that buy and create a public market for the stock to begin trading.

Joe Public’s only option is to buy Facebook stock after the IPO starts trading in the secondary market on the New York Stock Exchange or on the Nasdaq. But here’s the rub. The initial Facebook IPO price was $50 but now the stock opens at $125. Its valuation has almost tripled.

Now you’re really got a headache. So you decide to wait a few months and buy once the price settles down. Problem is, the price isn’t going to settle down for a while.

What Joe Public doesn’t know is that there is also a period of time imposed by federal financial regulators known as an IPO lock up period. It usually lasts 90-180 days. The purpose of the lock up is to make sure large shareholders such as Facebook CEOs and other company executives don’t flood the market with shares during the initial trading period.

In other words, it may make sense to wait until all of the sellers have sold. Why? Because selling by insiders (company executives) usually creates dilution. Dilution means your shares could be worth less because there is more supply flooding the market. The more supply, the less valuable the stock and the less it’s worth.

Buying IPOs can work as long as you understand how it works. Look at Google, Yahoo, Ebay, Amazon, and Priceline. These are some of the winners and there are tons of losers. But beware Joe Public. You are the lowest on the food chain and the odds of you getting hot IPOs at the initial price is next to impossible.