Inc. talks to Spring Street Brewery's founder about how he raised capital through the World Wide Web

Q. So your company, Spring Street Brewery, was two years old and strapped for cash. Why didn't you go for a traditional initial public offering? What drove you to do an IPO on the Internet?
A.
I had barely $200,000 in working capital left when some venture-capital firms got me excited about maybe getting $5 million from them. But over the next six months not one of them said, "Here's the money." They told me to keep in touch. Venture capitalists like to get to you early, open a dialogue, then string you along. That's where we were when I decided to go public.

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Q. So frustration led you to go public?
A.
There had to be a way to raise money other than wasting my time with those guys. Before I started Spring Street, I worked on Wall Street as a corporate lawyer. I was involved in companies that had used Regulation A issues to sell stock directly to the public. They were mostly marketers with a built-in base of supporters for whom the survival of the company was important. Spring Street may have been tiny, but we were much the same. People liked our beer. I believed that if I offered a venture-capital-like security -- risky on its face but full of promise -- they'd be willing to take a gamble. So I packaged the company into a nice prospectus and marketed it on the World Wide Web.

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Q. You hoped to receive the Regulation A ceiling of $5 million. Was less than 40% disappointing?
A.
It wasn't a home run the way it would have been had we sold $5 million in one shot. But $1.6 million in relation to the size of our company was a tremendous boost.

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Q. Does the ease with which you were able to go public on the Web indicate a regulatory trend toward less coddling of public investors?
A.
I don't know if it's less. Under federal securities laws you can sell almost anything to anybody, provided you disclose who you are and what the risks are. The laws have always been predicated on an abundance of faith in the intelligence and sophistication of investors. Once you tell people the facts, they're on their own.

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Q. Were you surprised that the media responded so effusively to the offering?
A.
I was amazed. To me it wasn't a grand plan or even a significant breakthrough. As soon as I announced my intention to use the Internet for an IPO, though, the press concluded that no one had ever done it before. I didn't anticipate the potential people would see in the idea -- how this little company stumbled into a method that, taken to its logical extreme, could radically change the way stocks are sold. But soon I felt that excitement myself and seized the entrepreneurial moment. That's what my new venture, Wit Capital, is about.

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Q. What is it about?
A.
I intend to build a team that can bring to market and distribute securities with the efficacy of a leading investment bank. Wit Capital will back developing enterprises by selling public shares over the Internet at a venture-capital stage. That's not going to happen overnight, but the distributive power of the Internet makes it possible to conceive that it will happen. We already have a database of 150,000 electronic-mail addresses of prospective investors. Imagine that database growing to 10 million!

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Q. Are Internet users sophisticated enough?
A.
People who understand that there are such things as IPOs are relatively sophisticated by definition. Those who go the next step and recognize the value of investing in IPOs by purchasing stock directly from issuers, as opposed to getting in only after the preferred customers and institutional investors favored by the investment bankers have hyped the market, are particularly sophisticated. They understand that brokers and institutions take a big chunk of money out of the system every time an IPO comes along. In addition, there are great inefficiencies in the printing of documents and the mailings and the road shows and the fancy overhead. All I'm saying is, there's a better way.

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Q. Would Wit Capital buy the issue and guarantee to float the whole thing?
A.
We plan to offer that guarantee. But we probably won't have to take on actual ownership, because the traffic at our Web site will be a powerful mode of distribution. Having captured E-mail information about prospective investors and being able to communicate with those investors through broadcast E-mail will give us an enormously effective way of distributing first-tier securities.

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Q. Won't using the Internet cut out institutions, which are the major market for IPOs now?
A.
It will be egalitarian. Institutions will receive the same E-mail as everyone else; they'll be given the same information and permitted to buy shares at the same time and on the same basis as everyone else. What won't happen is institutions' receiving special treatment in exchange for their participation in the ultimate public distribution of shares.

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Q. Wit-Trade -- the digital stock exchange that you set up to provide a market for the 3,500-odd investors who bought into Spring Street's otherwise illiquid float -- also triggered considerable media coverage.
A.
Actually, more than the IPO. That's because comparatively few people buy stocks in IPOs, but anybody who has a financial interest in anything has to use a broker. We've begun a chain reaction that's not going to stop, creating a method by which people will be able to buy and sell stocks themselves without having to pay brokerage commissions at all.

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Q. Not only did the SEC allow it, but SEC commissioner Steven Wallman called it "terrific," "innovative," and "fantastic."
A.
He was so enthusiastic that my friends wondered what was in the water down in Washington! He sees the same things I see: the digital era is going to make markets more efficient and capital more accessible to a wider range of companies, and it's going to dilute the hold of large financial institutions.

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Q. On listed exchanges, dealers are obliged to take the opposite side of the market during extremes to help keep moves from getting out of hand. Is Wit-Trade equally prepared to do that?
A.
In all honesty, we haven't developed a satisfactory strategy to address that. There's an argument that trading ought to be free, that if a stock is falling, let it fall. People shouldn't be afraid of a free market where everyone has unlimited access to information. But yes, helping to keep trades from getting out of hand has a calming influence, and we're going to have to figure out what, if anything, we can do to replicate it.

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Q. Is there any reason why any small business shouldn't try to pull off essentially the same deal you did?
A.
Not everyone can afford to get through the legal process. As in a fully registered offering, with a Regulation A offering you still have to get full state and federal regulatory approval, although the forms are simpler and the fees are less. You have to do financial statements according to accepted accounting standards. If you don't have the money or skills to write a good prospectus, you're not going to be able to tap the public market cheaply.

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Q. So it's not quite the do-it-yourself project it seems.
A.
Well, it can be. Legal and accounting fees are the obstacle. But you can do a lot of the work on your own and hold those fees to as low as $50,000 by looking at prospectuses from other companies and developing the document yourself. There is less law in a prospectus than there is common sense and business sense. Sit down with lawyers afterward and tell them, "Here's the document; you make it comply." You shouldn't blithely show up at a law office and announce, "Take care of this IPO and send us a bill." They'll send you one, all right -- $75,000 for starters.

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Q. Is the Internet a fresh source of capital for small private businesses?
A
.There have been few, if any, opportunities available to people of moderate means to invest in securities that aren't of the highest level. But there are many investors with discretionary capital for whom it would be interesting to pick from an assortment of start-up businesses. A place where the public could buy and sell the equivalent of start-up companies in a liquid market could draw an enormous pool of capital.

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Senior writer Robert A. Mamis (bob.mamis@inc.com) interviewed Andy Klein for this article. Research assistance was provided by reporter Jerry Useem (jerry.useem@inc.com).