July 28, 1999 8:50 PM PDT

Rules undercut Red Hat IPO goodwill

A gesture of goodwill on the part of software maker Red Hat has generated some ill will with the very people the company hoped to reward.

Linux seller Red Hat had offered several open source programmers the opportunity to participate in the initial public offering of the company's stock, which likely will take place in the next two weeks. However, at least a dozen people who were invited to participate have informed Slashdot founder Rob Malda that they've been rejected by E*Trade, the electronic trading company helping with the IPO.

It seems all that glitters is not gold in the high-tech industry, even though stories of financial windfall are legion amid the scene of so many companies rushing to go public. The price of a hot new issue often jumps markedly, and those who were invited in during the early stages can make a big profit.

"After I opened an account and moved my money, I was told that I'm ineligible for the IPO because I have no stock-trading experience," one person posted to Slashdot, a discussion group that's a favorite among Linux fans. "Isn't it ridiculous to 'invite' a bunch of Linux geeks to buy Red Hat if only experienced traders are eligible?"

But receiving the invitation letter isn't enough to guarantee that a person can participate in an IPO, said E*trade spokesman Tim Alban. "There are certain investment profiles that would make [some investors] inappropriate," he said. "This is for their own protection."

The screening is required by National Association of Securities Dealers regulations.

People who applied to participate in the IPO were specifically warned on E*Trade's Web site: "Public offerings are considered speculative investments, and therefore you will be required to answer and pass a series of questions about your investment experience, goals, and your financial background," Alban said.

The notice of ineligibility gives a phone number at E*Trade where people can call if they want to discuss the matter further, Alban said.

Daryll Strauss, a Precision Insight employee, said he understood that investment opportunities aren't open to anyone. "You've got to demonstrate that you know what you're doing, that you're not putting your life savings on the line," Strauss said.

Strauss added that he doesn't expect a huge number of shares to be available to those who were offered the Red Hat investment opportunity. "I've done these things before, and I suspect the offerings will be relatively small," he said.

In open source programming efforts such as Linux, anyone can see, modify, and redistribute the blueprints of a piece of software. While increasing numbers of Linux developers are on the payroll of Red Hat and other companies, much of the Linux effort has been unpaid work done in programmers's spare time.

Red Hat spokespeople were not immediately available for comment.

 

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