It's often difficult to scoop up shares before they're listed on a public market and given the hype surrounding Facebook Inc.'s planned IPO, it's going to be even harder for average investors to get the shares at the initial price.
John O'Connell, CEO at Toronto-based money manager Davis Rea, says "99.9 per cent of Canadians aren't going to get any Facebook on the IPO."
And to make matters more frustrating for Canadians, the company's underwriters – those responsible for doling out the limited number of shares – grant access only to the biggest of Canadian players.
There are few Canadians or Canadian firms wealthy enough to have an account at the American investment behemoths Morgan Stanley, JPMorgan Chase and Goldman Sachs.
Facebook said in its 200-page prospectus, filed Wednesday with the U.S. Securities and Exchange Commission, that it plans to raise an initial $5 billion by selling a portion of its shares.
Depending on the market reaction to its IPO, the entire California company could be valued at US$100 billion or even more.
Facebook did not indicate an initial offering price, which will be determined by the level of investor interest, but it's estimated at between $30 to $35 per share.
That would mean about 167 million shares in circulation, which scarcely covers the intense demand for the world's biggest social networking website.
"They're only going to give it to their biggest, best client and even they're going to get very, very small amounts," O'Connell said.
After friends, family and hedge funds and institutional investors, who have the scale to buy large chunks of the stock, retail investment firms, who usually receive fewer shares than they want of a stock that's in high demand, will buy and distribute the shares they receive among their clients.
By the time Facebook shares begin to trade publicly, in about three months, the limited supply and big demand will likely push up the stock's value.
It's difficult to know at the outset whether investors will overpay or get a good deal, since it will depend on unpredictable factors such as what the stock does in the longer term and when they sell their shares.
IPOs often get investors excited but in Facebook's case ``take the normal irrational exuberance and multiply it by about 10,'' said Mike Moffatt, an economist at Western University's Richard Ivey School of Business.
"It does have a very broad mainstream appeal that I can't remember ever seeing in an IPO, at least not since Google."
O'Connell said he's going to wait until the company has been trading for at least six months and delivered financial results before he begins to consider it.
"It's amazing that so many people want to buy this thing and they don't know anything about the company's financials – that says a lot about investors' thought processes."
"Some of these stocks change at huge, huge premiums initially and oftentimes they tend to drift lower over time because investors start taking a very sober second look at what the business is all about."
Facebook's regulatory filings this week showed what analysts have long suspected – that Facebook is very profitable and growing.
The company, started in 2004 by Mark Zuckerberg in a Harvard dorm, has seen its annual revenue soar from $777 million in 2009 to $3.7 billion last year. Facebook's earnings have grown at a similar rate, ballooning from $122 million in 2009 to $668 million last year.
Facebook ended 2011 with $3.9 billion in cash. That's a relatively small amount compared to the nearly $45 billion that Google has in the bank and peanuts compared to Apple's nearly $100-billion stockpile.
The IPO will add to Facebook's horde of cash since most of the money paid for each share will go to the company, after underwriting and other fees are paid. When the shares trade on the public market after the IPO, the money will flow between investors rather than to the company itself.
Investors will be hoping the stock's value continues to go up after they buy it, but there's no guarantee.
The list of IPO disappointments includes Zynga Inc., which has built a profitable business by creating a variety of games to play on Facebook. Zynga's stock fell five per cent below its IPO price on the first day of trading.
Investors appear to be hoping Facebook could be the next Google, which opened at $80 per share and is now worth $580 per share – but Moffatt points out there's also many more technology companies that failed.
"Were talking about a valuation that would be half of Google's despite the fact that Google has 10 times the revenue ... I think the math just doesn't add up," he said.
If the $30 per share estimate is correct, Facebook is being offered at 20 times its sales, whereas when Google (Nasdaq:GOOG) went public it was offered at about 10 times sales. Apple (Nasdaq:AAPL), the most valuable company in the world, trades at three times sales.
For Facebook's IPO valuation to make sense, revenues would have to increase five-fold.
There are a number of risk factors associated with Facebook including its need to diversify away from one business and one source of revenue, potential for future growth as it already dominates a number of markets, regulatory and privacy concerns, emerging competition, and Mark Zuckerberg's controlling stake and reluctance to branch out.
Facebook is just the latest tech company to make an eagerly awaited IPO in the last year.
The crop has included Internet radio service Pandora Media Inc., professional networking service LinkedIn Corp. and daily deals company Groupon Inc. Most of those Internet IPOs haven't lived up to their lofty expectations.