As I’m sure you’ve all heard by now. Vonage has decided to offer some of their customers a shot at getting in on their IPO action. I happen to be one of those elligible customers, but should I buy in?

To be honest, when I first heard about the IPO and the fact that I would be able to pick up a few shares, I was really excited. I contacted the other InvestorGeeks and we all chattered about how cool it would be to get in on an IPO. But not just an IPO, an IPO of a company  that offers a service all of us believed in.  

But before we all jumped on board, we decided to check it out. We downloaded the prospectus and did a bit of poking around, and a bit of thinking. We discovered some very interesting things in only a short amount of time.

What did we discover? Well some of it is solid fact, some of it is a feeling about the business environment, and some of it is unsettling conjecture. We’ll start with the cold hard facts however.

After looking through the prospectus three things stood out. The first, that Vonage is currently (about) $500 Million in the hole. Why? Their spending on marketing. It’s understandable that a company such as Vonage needs to get their name out there. But they readily admit “this strategy will have the effect of delaying or preventing us from generating net income in the near term”. Which is not something I enjoy hearing.

The next thing I noticed was their laundry list of risk factors. In which they mention their unprofitability, their competition, and their dependence upon their customers existing broadband connections. Which may as well read, “we depend on our competition”. In the absence on net neutrality legislation, this is a huge issue. At any given time, the companies which Vonage is competing against, could decide to block access to the service. Vonage would have little if any recourse. While the legality of such a move on the parts of Vonage’s competition is still legally grey, it’s worth noting that Verizon has, in the past, been fined for not providing¬† “the same level of service to competitors as it’s own retail customers”.

The last intriguing tidbit was that, apparently, the founder and Chairman of the company, Jeffrey A. Citron has been fined for securities fraud in relation to Datek Securities Corporation (page 118 of the Prospectus). Not exactly confidence instilling. Now, on to the conjecture.

Why, exactly, did Vonage decide to offer shares to their customers? In most IPOs, the vast majority of shares are offered to underwritters, and other big players. So why would Vonage offer lowly customers the opportunity to purchase lots as small as 100 shares in size? In my opinion there were a number of reasons.

The first of which was that it would create a buzz. VoIP is not exactly a hot topic right now. There are a number of reasons for this, tech’s out of favor for one. But more importantly, most people just don’t care about it. VoIP is a change in the underlying architecture of how phone calls are made. Not a change in how people use their phones. So lacking any sort of buzz, by offering shares to their customers they created their own. Whether or not it worked is debatable. It barely made a blip in tech circles, and I’m not even sure it registered anywhere else.
Second, I feel that a good number of customers will be excited by this opportunity and buy into the IPO. This will help Vonage sell additional shares and, perhaps, avoid an immediate drop in share price.

While I’ll keep an eye on the company, overall I am not impressed with what Vonage has to offer at this time. I will not be buying into the IPO. The company’s history, it’s leadership, and the fact that it’s entirely dependent upon its direct competitors to provide its service all leave me with a sour feeling regarding this offering.