When Mom Pop Go Public

Despite the extra effort, many companies are raising capital by selling their own stock.

Tweet

Capital

Across the nation, ordinary businesses are peddling their stock. It's not that easy

Forget those dignified ads announcing stock offerings in the Wall Street Journal. These days entrepreneurs are trumpeting their stock sales any way they can--on tags hanging off clothes in stores, on six-packs of beer, and inside boxes of macaroni and cheese. What's going on here? Enterprising company owners are using direct public offerings (DPOs) to sell stock directly to investors rather than through Wall Street brokers.

For most of this century, companies have tapped interstate public markets through underwriters and complied with the stringent disclosure requirements of the U.S. Securities and Exchange Commission. Then, in 1989, the SEC approved a simpler way for small businesses to make a public offering, best known as a small corporate offering registration (SCOR). Companies can use SCORs to raise up to $1 million in a 12-month period without filing with the SEC. Today 45 states allow this kind of offering. Companies register with state regulators and answer a series of questions about their business, financial history, and plans. For companies raising more than $1 million, there are other DPO options, such as a Regulation A offering. (See "What Is a Direct Public Offering, Anyway?" below.)

How common are DPOs? Last year 31% of all companies trying to raise public equity capital in the United States for the first time used DPOs instead of going through Wall Street. As the SEC continues to ease restrictions and the Internet becomes a more appealing venue for selling stock directly, that number promises to increase. Regulation A offerings, for example, were recently made available to companies with up to $10 million in assets--up from a previous limit of $5 million.

Although they're attractive to capital-hungry entrepreneurs, direct public offerings don't represent easy money. As Barry Guthary, chairman of the Small Business Committee of the North American Securities Administrators Association, puts it, "There's no simple way to get money from the public." According to the SCOR Report, a newsletter published by Tom Stewart-Gordon, there were 253 DPO registrations filed last year. However, in Stewart-Gordon's experience, about 60% of DPOs fail. Statistics from the state of Washington, which was the first state to approve the offering format used in SCORs, are even more pessimistic. According to Bill Beatty of the Washington State Securities Division, only about 27% of the state's DPOs succeeded in raising their minimum offering amounts.

The reasons for the high failure rates are simple. "A SCOR is typically the last resort for a lot of people," explains Beatty. "It's a good tool, but it doesn't turn a company that wouldn't be a good candidate for the public markets into one." In addition, entrepreneurs may excel at selling their product yet have little experience selling stock. Without a ready market for their offering, many companies can't overcome the absence of an underwriter. Those that do generally sell to affinity groups--customers, employees, suppliers, distributors, friends, and next of kin. "If you don't have a strong affinity group, you'd better have a good marketing concept," advises Lisa Sireno, assistant director of the Missouri Innovation Center. Many DPOs fail even with a loyal following and a strong marketing plan. Still, it is possible for ordinary small companies to raise money through this new method--but there are plenty of hurdles.

For starters, there's the nagging problem that most of the general public has no idea what a DPO or a SCOR is. "Investors are naturally cautious because they're dealing with both a company and a type of offering they've never heard of," explains Stewart-Gordon. Even if you have a ready-made pool of potential investors, selling stock directly is difficult. Thanksgiving Coffee Co., a coffee and tea wholesaler with projected 1996 revenues of $4.6 million, wasn't a bad DPO candidate. After 22 years, the Fort Bragg, Calif., company had a loyal customer base to approach. But the offering was still hard. "You think that everybody who knows about you will line up around the block to buy stock, but you have to put the offering in front of potential investors' faces seven times to get them to take action," says Thanksgiving general manager Rick Moon.

Moon did just that. He put offering notices on coffee-bean bags. In stores he hung announcements on bean dispensers. Vendors got the advertisements, as did mail-order customers. Information about the stock sale appeared on the company's World Wide Web site, in its catalog, and in advertisements in targeted magazines. Anyone who called about the stock got regular updates on the offering. In the end, the huge effort paid off. By the time the offering closed, this past September, Thanksgiving Coffee had sold 20% of its stock for $1.25 million.

Sound like a massive undertaking? Consider what Michael Quinn went through last year to sell his Regulation A offering. Quinn, owner of Hahnemann Pharmacy, in Albany, Calif., knew it would be hard to explain homeopathy--a form of natural medicine--and sell stock at the same time. Instead, he bet that homeopathy enthusiasts would be interested in shares of his homeopathic-remedy company, which projects 1996 sales of $750,000. The challenge: tracking them down.

 1 | 2 | 3 | 4  NEXT 

Read more:

Sign-up for our Small Business Success Newsletter

Email Address: