Vermont companies going public, and it might not be such a good idea

Vermont Business Magazine, Jan 1994 by Andrews, Richard

An extraordinary bull market in stocks is spilling over from Wall Street and causing both excitement and turmoil in Vermont.

Taking advantage of an unprecedented enthusiasm for new public offerings, more Vermont companies have gone public in the last year than in the last decade -- and possibly longer than that. More are preparing to do so, and still others probably will decide to go public as long as the market for new issues is hot.

The increased activity in stock markets generally is straining the resources of both federal and state market regulators. At the same time that stock offerings and mutual fund registrations are proliferating, fraudulent or unregistered activity (unrelated to the Vermont companies going public) is at least keeping pace with the booming pace of stock sales.

In addition, the Vermont Securities Division is contending with several new fields:

*The division is proposing legislation to regulate financial planners and investment advisers. Vermont is one of only two states east of the Mississippi with no regulations to protect customers.

*The division has issued guidelines governing increasingly prevalent alliances between banks and brokers. Typically, a bank provides space for a broker to sell stock, with the bank compensated by a percentage of the sales. The bank makes something on money that will leave its low-interest accounts anyway; the broker has a first shot at the money; and the customer gains convenience. The problem: many (if not most) customers think that buying a mutual fund or other equity investment within the four walls of a bank insures against loss -- but they're wrong.

*The division will be taking a look at some stock exchanges that may have bent their normal rules in their eagerness to list the stock of Vermont companies going public. If there are problems, future listings of Vermont companies going public on the exchanges involved may require state approval.

IPO MARKET IS RED HOT

For months, seasoned observers in the national financial press have contended that the market for initial public offerings, or IPOs, is not only hot -- it's getting "frothy." By that they mean the eagerness to snap to new issues of stock and promptly bid them to high prices has become irrational, given the high risk that normally comes with new issues.

It's a climate that typically accompanies the later stages of a long bull market. In this case, the enthusiasm for stocks in general, and IPOs in particular, is fed by determination to avoid low interest rates, as well as the fact that it's been a long time since stocks have gone down much. People are pulling money out of certificates of deposit and other low-yielding investments and going into stocks or stock mutual funds -- often without realizing how easily they could lose 30 percent or more of their principal.

IPOs are more risky than most stocks because they usually are initiated by small companies with big expansion plans. If they win, they win big. But they also can, and often do, fall flat on their faces. In addition, there is a tendency for owners to sell a piece of their company to the public only when the public is willing to pay a higher price than the owners believe the piece is worth.

Naturally, everybody hopes the Vermont companies going public will succeed. But their situations are inherently risky, and the standard advice is that inexperienced investors who want to take a flier should make it a very small one.

"I think they (the companies going public) have noted that the stock market is very hot, and that there's a great demand for IPOs," said Richard S Cortese, deputy commissioner of the Vermont Securities Division, which regulates stock offerings in Vermont. "These companies look at this as the time to get in.

"I've been in this business since 1987, and we've seen more IPOs developed by Vermont companies in this calendar year than in all the years since 1987 combined. It is utterly unprecedented."

Cortese warned against getting carried away. "Of course, every company in Vermont thinks it is going to be the next Ben & Jerry's, and, unfortunately, that legacy ultimately influences investors," he said. "When we receive inquiries about offerings, we try to advise people to judge each offering on its intrinsic merits, or lack thereof. Some of these offerings may be too risky for the average investor."

The good news is that if a company has reached the stage where it can benefit from an IPO, that indicates the economy is treating it well. As Cortese put it, "I think this spate of IPOs says something good about the Vermont economy, at least on a micro basis. Maybe we can take some heart from that."

Still, he said, "Should the market turn bearish, many of these stocks will fall in the aftermarket. The first folks in a hot IPO are going to do real well in the short term. If you bought in at 10, on day number two you may have been in a seller's market. The little guy may buy in at 20 on the second day. If the market has been overvalued, there is every possibility that the price will slowly or even quickly erode. As a long-term investment, IPOs in newer companies are generally fairly risky."