Catching the Alibaba IPO: Not So Fast

by: The Sun

I have been keeping my expectation high for the upcoming Alibaba IPO on Hong Kong Stock Exchange. Got an E-Trade Global Trading account and transferred a substantial amount of money (to me) in hoping to get a piece of it when the stock begins trading on November 6th in Hong Kong. Now it seems I will have to wait 40 days before I can get my hands on it.

After I posted the entry on Alibaba IPO the other day, I got a couple emails questioning whether I will be able to purchase the stock on Nov. 6. That’s basically my assumption because I can buy an IPO stock on the secondary market as soon as it goes public in US. And when I searched E-Trade’s website, no information turned out that’s related to stocks listed on foreign exchanges.

To make sure I didn’t misunderstand the rule, I called E-Trade Global Trading yesterday and asked specifically the 40-day period and IPO stocks listed on Hong Kong. I was told by a CSR that I can indeed trade the stock on Nov. 6 when it goes on to the open market. However, late yesterday afternoon, reader Mike emailed me a message he received from E-Trade regarding the IPO which says “It is true that E*TRADE customers are not able to place trades for forty calendar days after the IPO begins trading.”

One said Yes and another said No. Still very confusing. So I called E-Trade again this morning and asked if there’s any rules for this matter. At first, the CSR said it’s between E-Trade and HKSE (or any other foreign exchange) that electronic trading for an IPO stock won’t be available in the first 40 days. Then, after putting me on hold for a couple of minutes, the CSR came back and said there’s indeed a SEC Regulation S that defines the 40-day cooling-off period.

I did a little search and found an article on that explains the 40-day period:

The 40-day “restricted period” for equity securities sold offshore by U.S. issuers who are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (”Exchange Act Reporting Companies”), has been lengthened to one year, and has been renamed the “distribution compliance period” (”DCP”). The DCP is the 40-day or one-year period beginning on the later of (i) the date when the securities are first offered to persons other than distributors in reliance on Regulation S or (ii) the closing date of the offering. During this period, issuers and investors must observe certain restrictions (including compliance representations and legending of the offered shares) to ensure that the securities have not been purchased with the intent to resell them into the U.S.

Further more, according to the article, the rule seems to apply to the so-call Category 2 securities, which are defined by SEC as

  • Equity securities of foreign 1934 Act Reporting Companies; or
  • Debt securities of (i) U.S. and foreign 1934 Act Reporting Companies, and (ii) foreign non-reporting companies.

And requirements for Category 2 securities include:

  • Offering effected as an “offshore transaction.”
  • No “directed selling efforts.”
  • “Offering restrictions” apply.
  • No offers or sales to (or for the account of) any U.S. person (other than a distributor) during 40-day DCP.

Well, if that’s the rule, then there’s nothing I can do but wait for the 40-day period to expire. Sure, I am a little disappointed that I won’t be able to buy the stock on the first day of trading, but it may not necessarily be a bad thing. Unless it goes up every day, there’s always opportunity to get it after the initial frenzy settles down.