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May 31, 1998

Wit Capital's Digital IPOs

By Stephen Lacey

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  • Wit Capital's Digital IPOs

Wit Capital, a 33-person broker dealer that conducts its investment-banking business exclusively on the Internet, is causing tremors on Wall Street.

The digital upstart and National Association of Securities Dealers member firm is offering prospective individual investors access to initial public offerings and other early-stage investment instruments, including plans for a series of angel funds.

"There's no doubt in my mind about the power of the retail investor," said Bob Lessin, New York-based Wit Capital's recently-appointed chairman, and one of Wall Street's high net-worth investment experts, or angel investors. "It's a powerful constituency. As more mergers create [brokerage] behemoths, it is clear there is an underserved niche."

Since opening its capital-markets operation in September, Wit Capital's customers have participated in 12 IPOs originated by ten lead managers, including deals by New York-based firms Bear, Stearns & Co., PaineWebber and Prudential Securities, and Baltimore-based BT Alex. Brown.

In a landscape where the giants keep more of the IPO pie, will such a retail-oriented strategy succeed? One thing is certain: Lessin and his heavy-hitting management team are already raising eyebrows on Wall Street.

"What they're doing is our competition," noted the head of one New York-based syndicate desk. "With their management team, they could be very competitive with full-service brokerages."

Antidote Against Flippers

A key to Wit Capital's underwriting success, according to sources, will be convincing other syndicate members and companies that retail distribution means quality distribution. Critics charge that some retail investors referred to as flippers are quick to take profits in an offering's first day of trading.

Wit Capital's ability to track its customers' trades should discourage flipping. What's more, Wit Capital has another tool to discourage customers from cashing their shares during the first 60 days of an offering: penalties and exclusion from future IPOs.

"We ask investors to make long-term investments," said William Feeley, Wit Capital's director of capital markets. "And, so far, our clients have been aftermarket buyers in every issue but one."

Placing stock directly digital-affinity distribution in the hands of a company's trusted stakeholders, such as customers and employees, is perhaps Wit Capital's best antidote for flipping.

The new technology enables Wit Capital to:

* Tap an issuer's roster of customers, employees and suppliers.

* Open accounts for individuals in the group who want to participate in IPOs.

* Distribute electronic prospectuses.

* Accept indications of interest to purchase shares in an offering.

"This proprietary system enables Wit Capital to quickly and digitally open thousands of accounts for new customers without any incremental cost to the issuer," noted Andrew Klein, the firm's founder and chief strategist.

Complementing its affinity distribution, 140,000 individual investors have navigated to Wit Capital's Internet site over the last eight months. Through co-marketing arrangements, the potential pool of investors climbs to three million, according to firm officials.

To participate in Wit Capital-sponsored IPOs, investors first need to navigate to the investment bank's web site (www.witcapital.com). New accounts must complete an investor profile. The minimum account balance is $2,000. Investors can download a preliminary prospectus from the web site and place an indication of interest.