Talk about great timing. And pouncing on opportunity.
In 1993, former securities lawyer Andrew Klein, then just 33 years old, left the staid world of a top New York financial district law firm to start Spring Street Brewery, craft brewers of Belgian recipe ales known as Wit and Amber Wit. Klein had become intrigued with the variety after a stint living in Holland and both brands are now well-known in Manhattan drinking circles.
A native of New Jersey’s northern suburbs and a graduate of Harvard Law School, Klein financed the venture with a $500,000 private stock offering. Then last year, seeking to expand the by-now $1 mn-a-year brewery, Klein sought to launch an initial public offering of the company’s stock. Thus began the arduous and time-consuming process of dealing with investment bankers.
Then lightning struck. Klein, an Internet hobbyist, had the notion of selling his shares directly over the World Wide Web, bypassing traditional financial intermediaries.
‘I thought that before we ran out of money, we should go out to the constituencies we knew liked us,’ Klein recalls. ‘The idea was to market our stock the same way we market our beer. To beer enthusiasts.’
Klein’s timing could not have been more fortuitous. Just as the World Wide Web was capturing the imagination of millions of home and office computer users, along comes a young, handsome fellow with a populist pitch: Why not use this powerful new technology to give a wider universe of investors more of a chance to participate directly in what has always been the closed, clubby world of IPOs?
The Web site design was done largely in-house. Klein, the lawyer, filed the necessary documents and secured a green light from the SEC. Not one underwriter was retained. The publicity mill did kick in, however, with Klein and Spring Street enjoying something of an avalanche of media coverage.
The IPO itself was an undoubted success, albeit on a minute scale by Wall Street standards, with Spring Street Brewery raising some $1.6 mn by selling 800,000 shares. Along the way, Klein has earned himself the moniker as the Charles Lindbergh of the Internet, according to Toronto’s Financial Post and others.
His next move was to create a Web-based secondary market for Spring Street Brewery shares. At this point in the tale Klein encountered a bit of a road bump when mid-level SEC regulators nixed the idea. However, he soon got over that when forward-looking commissioner Steven Wallman intervened, coming up with a compromise proposal.
‘He called me directly and said that if we would temporarily suspend, the SEC would review quickly and would set up modifications to be in compliance,’ Klein says. ‘They came back within ten days and gave their permission.’
At first, the secondary market was rudimentary, with essentially separate online bulletin boards for sell and buy notices. Individuals had to communicate directly with a counterpart on the other side, using e-mail or fax.
But all that is about to change. In the spring of this year Klein announced the formation of Wit Capital Corporation, which he says will be the world’s first digital investment bank and stock exchange on the Web. He says that some 800 companies have already contacted Wit for advice on how to be involved.
As an aside, there are some 800,000 individuals currently investing through some online service, and that number is clearly going to grow as the Internet continues its stampede to true ubiquity.
So contemporary financial titans, take note. You may be confronted with the JP Morgan of the Cyberage. To say that Klein has great ambitions for the venture is merely to betray the obvious.
Using processing technology first developed for the Chicago Stock Exchange and incorporating a trading mechanism run by Reuters, the Wit online service will allow automatic order matching. Trades will be instantaneous, with clearing through existing houses. The brand name for the service will be Wit-Trade.
Klein has raised about $3 mn so far to invest in the technology, against the total of $15 mn he believes will be sufficient to get the online service up and running in early 1997.
But it’s not the gee-whiz of the technology that is the most momentous aspect of Wit; more head-turning is what Klein expects to do with it.
Wit Capital plans to offer financial advisory services, act as agents in managing IPOs across the Internet, operate a discount brokerage, sell mutual fund shares, and more. The good news for individual investors is that they will not have to pay commissions for IPO shares; the issuing company alone will be responsible for fees to Wit.
IPOs apart, Klein is talking to companies which have Direct Purchase Plans for their stocks with a view to setting up hot links from their home pages to Wit’s, where investors would then be able to find a package of those plans.
With every advent of new technologies, there are losers as well as winners. And Klein clearly knows who stands to be burned if his online financial market takes off.
‘Today, the stock exchanges are protected by monopolistic practices,’ he says, pointing to the Order Flow Remuneration system as an example, which he describes as ‘a Madison Avenue executive’s attempt to redefine the meaning of ‘kickback’.’
Wit plans to show – onscreen, of course – different vendors competing for order flow, and their respective fees. But the reform Klein has in mind extends way beyond the nuances of managing a financial market. It strikes right at the heart of what keeps the suits comfortable in their Fairfield County mansions.
‘The IPO process today is not fair. Individuals get in too late or only if it’s a bad deal,’ he says, underscoring that it is often only a discrete group of institutional investors, having access to shares 15-20 per cent below where they should be priced, who do well out of an issue. ‘We’re creating a viable business by doing this more fairly,’ claims Klein.
One concept under consideration is to post onscreen a range of prices in a version of an automated auction, with the shares then distributed along the demand curve until the entire issue is gone.
Klein also expects to see a new breed of Internet-operating underwriters develop, but insists that history will not simply repeat itself in the new medium. ‘We will define the rules, and they will apply to everyone,’ he says.
Klein’s Wit Capital, assuming it succeeds, will be another catalyst in the ongoing unbundling of financial advice and trading. But for the lawyer-turned-brewery-CEO – and soon, maybe, turned financial tycoon – the last few years must have seemed unreal at times.
‘The eyes of the industry are on us,’ he says. ‘Yes, this could be a very big deal.’
