The Net Hits The Big Time

GMAC's bond sale is a milestone

On Sept. 27, General Motors Acceptance Corp. started marketing $500 million in bonds through Chicago Corp. What makes this otherwise mundane bond issue noteworthy is that it is being done on the Internet. A Web-based bulletin board, dubbed Direct Access Notes and run by the regional investment bank, allows investors to download the medium-term note's prospectus and use an interactive bond calculator. The 60 brokerages that are selling the bonds can view a GMAC multimedia road show via the Web. As for investors, they still must purchase the bonds through one of these brokerages.

GMAC says the Internet is ideal for pitching bonds issued by well-known companies to retail customers who don't normally get a crack at such offerings. In time, individual investors could buy bonds on Chicago Corp.'s Web site, take part in financial discussions, or even buy and sell stock directly from each other. David Walker, the GMAC director who spearheaded the Internet offering, says they could eventually raise $2 billion or $3 billion this way. "We're getting a new marketplace and additional funding."

That a powerhouse such as GMAC pursued its sizable deal on the Internet speaks volumes for how the Internet is altering the way businesses reach investors and raise money. So far, most of the pioneering has been on the retail-investor side. Some 800,000 individual investors buy and sell stocks on the Web through a handful of Internet discount brokers such as Accutrade Inc. and Lombard Brokerage Inc. But now, the Net action is moving toward Wall Street's most lucrative businesses: the underwriting and distribution of securities for Corporate America. "A huge revolution has been occurring over the past 12 months of capital-raising on the Internet," says Stephen M.H. Wallman, a commissioner on the Securities & Exchange Commission.

By revolutionary standards, though, this one is still in its infancy. GMAC is believed to be the only company of any size to turn to the Web to raise money. Virtually all of the activity has been among tiny companies, such as Spring Street Brewery and Logos Research Systems Inc. They have bypassed underwriters and brokerages to sell do-it-yourself initial public offerings directly to the public over the Internet. Further, entrepreneurs plan to launch virtual stock exchanges and online investment banks that they believe will reach retail and institutional investors more efficiently and cheaply. One startup, Albuquerque-based Ben Ezra, Weinstein & Co., is developing software to help companies draft their own prospectuses. The technology craze is even starting to fire up more mainstream companies.

San Francisco-based investment bank Hambrecht & Quist is creating an entirely new business--a brokerless electronic division that will use the Internet to sell individual stocks, mutual funds, and IPOs at the same rates given to Hambrecht & Quist's well-monied institutional clients. How can it do it? The company is counting on volume. To market its new Internet services, it is targeting employees at companies such as Boeing Co. and Silicon Graphics Inc., for whom it already manages stock-options programs. Starting on Jan. 1, it will offer these employees an array of services, including an Internet discount brokerage, an electronic library, and referrals for investment advice. Employees who meet certain criteria will also get a crack at coveted IPOs and other issues sold by Hambrecht & Quist's flagship business. "Our new market is Middle America," says CEO Daniel H. Case III. "We'll be the Price Club of electronic financial services."

E*Trade Group Inc., a public Internet discount broker that already offers retail customers Internet trading, is taking a different tack. It plans to enter the venture-capital market and underwrite Internet IPOs that it will market to its 90,000 active customers. E*Trade is waiting for regulatory approval on both fronts. "We have a boot-your-broker campaign," says CEO Christos M. Cotsakos. "Next is `boot your banker."' The fledgling Direct Stock Market, based in Santa Monica, Calif., is also waiting for SEC approval to start trading the stock of companies that do Internet IPOs on a bulletin-board market. "We're going to create a fourth market for sub-NASDAQ stocks," declares Clay Womack, president of Direct Stock Market.

Wit Capital, a New York-based startup, may be the most ambitious of all. Founder Andrew Klein, who raised $1.6 million through a Web-based IPO for his Spring Street microbrewery, recently hired an expert from the New York Stock Exchange to build an Internet stock exchange that is slated to use an auction-based system to match buyers and sellers. He also plans to become a discount broker and predicts that syndicates of online discount brokers will distribute Internet IPOs in the next six to eight months. "I'm not predicting that you're going to see a whole severing of [corporate] relations with Wall Street," says Klein, a former securities lawyer. "But if the issuer has an alternative or a complementary way to reach out to investors, then the power of those institutions diminishes."

DISTANT THREAT. Not surprisingly, the Wall Street giants don't quite see it that way. They argue that the likes of GMAC will still need investment banks to do the bulk of their financing for the foreseeable future. They see themselves as unique in their ability to provide liquidity by making a secondary market in their customers' securities. And they're not ignoring the Internet either. J.P. Morgan & Co. and Salomon Brothers Inc. are distributing research and prospectuses on the Web. "It's kinda cool," says Dexter Senft, co-manager of fixed-income research at Lehman Brothers Inc. "And it will save us lots of money. But I don't see it being a threat to Wall Street today."

The Web's uses will be limited until the legal and regulatory environment is resolved. The SEC is only beginning to grapple with how to control this burgeoning financial universe, while law enforcers are focusing on how to keep fraud from running rampant.

Regulators and others also fear that unsuspecting consumers will sink their money into unsuitable or completely illiquid investments. "What you don't get when you distribute directly on the Internet is the intermediary who is scrubbing the company--who knows whether what's being said is the truth," says Montgomery Securities CEO Thomas W. Weisel. Weisel believes clients will always want the judgment and skills of seasoned traders and analysts. He's also confident that the big firms will jump in later. "We would just as soon have some pioneers see if the market is there, and then we'll come in and take the parts that we want," he says.

Most agree that any radical transformation in the capital markets is still to come. "People have had false expectations that they can just put something on the World Wide Web and sell stock," says Anthony E. White of McKinley Partners, a Seattle-based firm working on an Internet IPO. "I don't think that's going to happen." At least not yet.

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