Anthony Noto, CEO of SoFi
Adam Jeffery | CNBC
Online finance startup SoFi is lowering the barrier for hobbyist investors to buy company stocks as they go public.
Historically, these IPO stocks have been reserved for Wall Street institutional investors or high net worth individuals. Retail traders have no way of buying from newly listed companies until those shares go public. At that point, the price has often shot higher.
“Main Street will have access to invest in a way that it would not have before,” SoFi CEO Anthony Noto said in a telephone interview. “It offers more differentiation and more access for people to build diversified portfolios.”
SoFi itself will be an underwriter in these deals, meaning it works with companies to determine the price of the shares, buys securities from the issuer, and then sells them to certain investors. It is common for brokerage firms to obtain a share of the IPO’s shares in that process. But they do not normally offer them to the daily investor.
Noto worked on more than 50 IPOs, including the one for Twitter, in his previous role as partner and head of the telecommunications and technology media group at Goldman Sachs. Companies like Goldman generate income from Wall Street funds, which often choose to participate in an initial public offering “based on the access they get to that unique product,” he explained.
“Individual investors don’t generate that kind of income, therefore they don’t have access to the single product,” Noto said. “The cost of serving the retailer, if they decided to do so, would be too high.”
SoFi customers with at least $ 3,000 in account value will be able to enter as many shares as they want as “reserve.” The app will alert them when it’s time to confirm an order.
Trading app Robinhood is reportedly working on a similar platform to offer access to initial public offerings, including its upcoming debut, according to Reuters. Robinhood declined to comment.
SoFi is slated to go public by merging with a blank checking company run by venture capitalist Chamath Palihapitiya. The merger with Social Capital Hedosophia Corp V valued SoFi at $ 8.65 billion. The company was founded in 2011, with a focus on refinancing student loans for millennials, and now offers equity and cryptocurrency trading, personal and mortgage loans, and wealth management services.
SoFi’s IPO product comes on the heels of record levels of new and younger traders entering the stock market during the pandemic. That rise has continued into 2021, marked by frenzied trading around so-called meme stocks like GameStop.
Noto said that less than 1% of SoFi’s accounts are “active traders” who trade more than three times a day and that the company has not offered margin or options trading. Still, he acknowledged the current risk appetite of some retail investors and the dangers of diving into new and unproven companies as they go public.
“Investing early is inherently risky, and those are less proven companies,” Noto said. “In the same way as cryptocurrencies, we reveal to people that they carry a higher degree of risk.”
Subscribe to CNBC PRO for exclusive information and analysis, and live business day programming from around the world.