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Fidelity seeks a bigger piece of IPO action

Fidelity’s headquarters in downtown Boston.

BLOOMBERG NEWS/File

Fidelity’s headquarters in downtown Boston.

Fidelity Investments is firing warning shots at Wall Street as it looks to break up the investment banking industry’s lucrative monopoly on taking companies public.

In an unprecedented step for Fidelity, the Boston financial giant convened a conference Thursday with high-profile venture capitalists, alternative financiers, and crowdfunding types. Their pitch to entrepreneurs: Skip the traditional investment bankers and their large fees for your initial public offering. Fidelity’s massive brokerage-customer base is hungry for IPO shares.

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“There is a group of investment banks who control the IPO market,’’ said Hank Erbe, the head of equity origination at Fidelity Capital Markets. “I worked on Wall Street for over 25 years, and I’m one of the guys who built the walls around the cartel.’’

Those are fighting words from a powerful firm that trades billions of dollars in stocks and bonds and does business with the Wall Street banks every day. When Fidelity gets slices of IPOs like Twitter’s to sell to its retail brokerage customers, it is depending on relationships with investment houses in New York for those shares.

Erbe said that Fidelity continues to partner with big IPO underwriters like Goldman Sachs Group and Credit Suisse Group, and that will not change overnight. But the company has been watching with keen interest the populist direction tht markets and fund-raising are taking, with programs like Kickstarter helping new products get off the ground by attracting money from small investors.

Typically, IPOs are underwritten by investment banks, which vie for the chance to take the most promising companies public. The companies pay fees of 6 to 7 percent for the bank’s services, which include doing research and placing the shares with large investors, including Fidelity.

Erbe complains that, despite all the changes in finance and technology over the past decade, Wall Street still has a lock on the way stock offerings work.

“The Internet has changed the way people lead their lives,’’ he said. “But nowhere has technology touched the IPO market. And that is the final frontier.’’

Broadly speaking, initial stock offerings via the Internet — so-called “electronic IPOs” — are one answer for emerging companies, Erbe said. This week’s conference, called “Innovation in Electronic Capital Formation,’’ tackled the issue, with 200 attendees and another 200 listening remotely, according to Fidelity executives.

Among the speakers was William Hambrecht, the longtime San Francisco investment banker whose current firm, WR Hambrecht + Co., offers “open IPOs,’’ which provide broad public access to stocks that are going public. He famously persuaded Google Inc. to set aside some of its 2004 IPO shares for sale through the public auction method.

It worked, Hambrecht said Thursday, but investment banking firms still wanted to exert control — and protect their 6 percent fees. “The reality was we ended up in a total adversarial relationship, representing the company against the underwriters,’’ he said.

Hambrecht said electronic IPOs can be a less costly alternative for companies going public, instead of a “wedding day” approach, or spending six months preparing for a much-hyped kickoff. For instance, prices can be tested in advance, he said, and changed depending on the response.

He also suggested that companies write their own offering documents, rather than pay lawyers $1 million to draft them.

After Google, Hambrecht said, investment bankers claimed they wanted to work together with him on other deals. He said a board member whose advice he particularly trusted, Harvard Business School professor and author Clayton M. Christensen, warned him not to believe that entrenched firms would cede any ground.

“He was dead right,’’ Hambrecht said.

Fidelity is not an underwriter and does not plan to become one, said Brian Conroy, president of Fidelity’s Capital Markets group. But as the largest retail brokerage firm in the world, with about 20 million customers, it wants to be able to provide people with more IPO shares.

Ahead of the Twitter IPO last November, 15,000 Fidelity customers indicated online that they were interested in buying as much as $600 million worth of stock at the initial offering, or 23 million shares, Erbe said.

But Fidelity’s allotment from the Wall Street banks was far less, just 250,000 shares.

The interest wasn’t fleeting, Erbe said. Today, Fidelity customers own 22 million shares of Twitter, or 4.5 percent of the company’s available stock.

“Our retail investors want to own IPOs on the initial placement,’’ Erbe said. “They’re not getting that access to the extent that we hope and we want.’’

In recent years, Fidelity has taken measures showing its interest in private, emerging companies. It employs researchers who specialize in hot private companies and who develop relationships with the venture capitalists backing them.

It has used its large mutual funds to make investments in these firms while they are still private. Two high-profile examples: the social media site Facebook and, most recently, Uber Technologies Inc., the ride-sharing service.

By investing in private capital rounds for startups, Fidelity also gets to turn those investments into large chunks of shares when those companies go public.

In 2013, Fidelity brokerage customers participated in 285 IPOs, generating demand for shares worth $3.5 billion, the company said.

The company requires investors who buy IPO shares to hold them for at least three weeks, so they can’t simply “flip” them for a quick profit and leave the stock in danger of a sharp early decline.

The whole arena for companies raising money from the public online has exploded since the passage of the federal JOBS Act in 2012, which eased regulations for companies with less than $1 billion in annual revenue when they look for capital.

Chris Tyrrell is the chief executive of OfferBoard, a new private placement firm in Princeton, N.J., that helps connect emerging companies with funding from $2 million to $25 million.

He acknowledged that lots of companies are trying to get into the business of online fund-raising marketplaces. Tyrrell believes new ways of matching companies with investors are going to change the way deals get done.

“It’s what eBay is to a garage sale,’’ he said. “You change what the transparency of the transaction looks like, and the speed of the transaction.”

Fidelity’s Erbe said the main goals are greater transparency, lower costs, and a level playing field for retail investors. But he did not set a limit for Fidelity in the coming years.

“This is going to be our beachhead,’’ he said.

Beth Healy can be reached at beth.healy@globe.com. Follow her on Twitter @HealyBeth.
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