Barred from Red Hat IPO?

Anonymous Crow writes "I was wondering how many other people out there are in the same situation: I was lucky enough to get "invited" to participate in the Red Hat IPO, but after I opened an account and moved my money I was told that I'm ineligible for the IPO... because I have no stock-trading experience. I opened an E-TRADE account for this purpose, and moved $1400 there to buy Red Hat stock. When I attempted to place my "indication of interest" (which is how you get into an IPO on E-TRADE) I had to answer a bunch of questions stating I'm not an employee of a stock-trading firm, not an employee of Red Hat, etc. And, by the way, how much stock I own and how ofter I play the stock market. After answering these questions the E-TRADE oracle apologized nicely and informed me of my ineligibility. Now, those of you that do this often are probably chuckling at my naivete, but honestly: I'm a linux geek, not a stock trader. Isn't it ridiculous to "invite" a bunch of linux geeks to buy Red Hat if only experienced traders are eligible? And shouldn't Red Hat have known better? " (I've had at least a dozen people contact me with exactly this problem)

SEC Requirements

The securities and exchange commission (SEC) is protecting you from yourself and fraudulent investment brokers. IPOs are considered extremely risky investments. You have to demonstrate (via the form) that you are qualified to invest in such things. That typically means a certain amount of trading experience, that you're not investing too large a percentage of your net worth, etc.

Red Hat and E*Trade don't have anything to do with it really. They invited you to participate, but if the SEC won't let you do so, there's nothing else they can do about it.

- |Daryll

Strange SEC rules, that the SEC even doesn't know

Ya know, the odd thing about these supposed SEC rules is that the SEC ignores that they exist...

Here's what happened to me:
Got the letter, transferred my existing brokerage account from TradingDirect to E*Trade, only to learn later on that "securities industries regulations" prevented me from participating because of my nationality. This information was not given to me prior to transfering my account despite a specific question about the subject. At E-Trade, I not only pay higher transaction fees than I did at TradingDirect, but I also get a worse service (no limit prices expressed in 1/32), for no compensation (the possibility of doing IPOs was a lure)

Puzzled, I called the SEC at 202 942 7040. There I spoke to Mr Jack Hardy, who confirmed to me that no such regulation exists. Apparently E*Trade is just limiting eligibility for their own convenience, and are cowardly hiding behind phantasy regulations.

Actually, by claiming the existence of these phony regulations, E*Trade may not only be misleading potential investors, but they may also be misrepresenting the SEC's position. Mr Hardy recommended me to fax a written complaint to 202 942 9634 (attn. Jack Hardy) and cc it to 650 331 6806 (attn. Henri Carter, Vice President of Compliance Department E*Trade Securities Inc.), which I did. So far, no change yet apart from a clearer message on their subscription page. However, I noted that the deadline has been moved to August 4th. This gives us another week, and if enough people make their voices heard, the SEC might lean on E*Trade hard enough to get us furriners our part of the cake too.

Re:SEC Requirements

Well you are a bit misinformed. The idustry is not directly regulated at all. The SEC can ONLY recommened they don't have direct control like the FCC does over AT&T. Both the NYSE and NASDAQ are self-regulated bodies. E*Trade has come under pressure by stories of people who have never traded becoming bankrupt to implement stricter checking policies. It was their choice and theirs alone to implement such policies. But it is true that they are really only attempting to protect inexpereiced invenstors from being screwed.

No surprise...

From "The Letter":

All applicants for public offering stock will be required to submit and
pass an online eligibility profile at the E*TRADE web site. Public Offerings
are considered speculative investments and therefore you will be required to
answer a series of questions about your Investment Experience, Goals and
your Financial Background.


Perhaps RedHat could have emphasized this more, or pointed out that it's an SEC regulation.

If they're going to screen on these criteria (as they have to), then it should be obvious what sort of answers they're looking for. For example, If you say your investment objectives are income or capital preservation, then you shouldn't be surprised if they think you shouldn't be investing in IPOs. Obviously they have no way of checking your answers anyway, but by asking they've satisfied the SEC and covered their ass in the event that you lose money and feel like trying to blame them...

E*Trade should have known better

E*Trade has a legal obligation to "know their customer" because they are a registered Broker/Dealer. Because of their obligation they have to qualify customers who are purchasing stocks, options, etc. I'm sure if E*Trade could sell you pieces of the clear blue sky, they would and still get a commission. Thankfully, the SEC regulates brokerage firms to prevent them from doing this.
As for your qualification, when you initially opened the account they probably asked you all of those questions anyway to try and qualify you for options, etc. With that information they could have gleaned that you weren't a likely candidate and shouldn't have sent you the letter. (hopefully they have this type of cross referencing in place) Otherwise it sounds like you opened a cash account instead of a margin account and they didn't have the info they needed to qualify you as a registered investor. Once they (E*Trade) were able to determine this they *had* to decline your request or you could take them to arbitration (and get money) because you could say that E*Trade should have known better than to sell an IPO to an inexperienced investor.
How do you get around this? Either start investing more and gain the experience or....lie. The brokerage firm has no idea if you are lying and really doesn't care as long as you have signed a contract stating that you are experienced. Brokerage firms do not have access to other firms trading records. Thus you could tell them that you play Butterfly spreads and foreign currency sythetics for fun and they have to believe you.
Red Hat has no clue who their IPO is being sold to. All they know is that E*Trade bought XX Million shares and E*trade is selling that many shares to customers. Do not be angry at Red Hat for a screwy system for IPOing securities. =)
...and lastly, since I'm at work and should really do something so they keep paying me. E*Trade is not the only one which is selling the IPO. Goldman Sacs is the primary underwriter. Of course you may have issues with their commissions.........

Jayson Pifer

Re:how are they stopping people....

Absolutely.

When a company goes public, it actually sells its shares to the underwriting syndicate who in turn sells it to their friends and customers. Both these sets of sales happen at the IPO price.

As a co-underwriter, E*TRADE has some number of shares alloted to it, that it can sell as it pleases. E*TRADE's standing policy is to sell 50% to its customers and the other 50% to anyone else, presumable institutions.

The other underwriters can do something similar. Chances are, a lot more of their shares will go to institutions than customers.

To make a long story short, unless the members of the syndicate sell allot shares to brokers outside the syndicate, no other brokers will be able to offer a piece of the IPO.