Direct Public Offerings

A final type of DPO is available through the SEC's intrastate filing exemption, Rule 147. This option allows companies to raise unlimited funds through the sale of securities as long as the stock is sold only in the primary state in which they do business. Both the company and all the investors must be residents of the same state. This exemption is intended to provide local businesses with a means of raising capital within their locale.

ONLINE DPOs

In the late-1990s, the "magic hand" of the Internet (as one might call it) was touted as a way taking dot-coms public and selling their DPO stock on the Web. Very little of that actually happened, looking back. According to Jack A. Rosenbloom writing in Journal of Internet Law, "During the boom, funding from venture capital was occurring at an astonishing rate, peaking at almost $100 billion in 2000'¦. Businesses with nothing more than an idea and a half finished business plan were going public at astonishing rates, peaking at 1,017 IPOs filed in 2000'¦. Businesses simply did not see the need to conduct their own Internet DPOs when more established alternatives were so readily available." By 2003 the venture capital had dried up—and it is venture capital that really comes from "accredited" investors. In that year only 118 IPOs were filed. When IPOs are hard to get, so are DPOs.

In any case, the hang-over after the dot-com collapse has brought it home to many that the Internet is not an amplifier of information as television is but, rather, a multiplier of it. To make a DPO stock offering visible on the Internet, the seller of stock must be assured of a high rate of traffic to begin with. If such traffic does not exist, it is like putting a notice on the backside of a suburban garage.

CAUTIONS

Although DPOs can simplify the process of raising capital, there is no guarantee that an offering will be successful. Robert Lowes noted back in the boom times writing in Medical Electronics: "In all types of DPOs, the companies usually declare a minimum amount needed to carry out the business plan. Seven of every ten SCORs fail to reach that target—to 'break escrow,' in the parlance." Small business owners considering a DPO need to realize that there is hard work involved. In fact, the business may suffer during the offering period: management often lacks time both to promote the offering and run the company. For this reason, DPOs are most likely to be successful in companies that are not overly dependent on their top management and that have a sound business plan in place.

DPOs are also more likely to be successful for companies that have an established and loyal customer base. Customers are often the best potential investors. Companies initiating DPOs can advertise their stock to customers on product packaging, through mailing lists, with posted messages in offices or other facilities, or by making the prospectus available on an Internet site. "Experts suggest that any company gauge investor enthusiasm before launching a DPO—because costs for attorneys, accountants, and marketing materials can add up," warned Carol Steinberg in Success.

Finally, companies can improve their chances for a successful DPO by availing themselves of expert securities advice. "Whether an offering is properly exempt from registration with the SEC is a matter for competent legal counsel and careful structuring of the offering. Errors must be avoided, since a faulty offering generally gives investors the right to get their money back," according to Zeune and Baer. The fact that a DPO does not have to be registered with the SEC does not release a company from compliance with the antifraud provisions of U.S. securities laws. Potential investors must have ample, accurate information to make an informed decision about whether or not to buy stock in the company. Finally, securities laws vary by state, so it is important that small business owners interested in pursuing a DPO consider the laws applicable to their companies.

 PREV  1 | 2