There's nothing fun about that kind of intensive, dogged selling. Just ask Walter Lewis and Memory Elvin-Lewis of WoundFast Pharmaceuticals, in St. Louis, two biologists who are more comfortable researching plants in Peru than selling stock in their start-up. The Lewises have been promoting their SCOR offering in a way that suits their style--at receptions in their home--yet it's still a struggle. By this past October the couple had raised $200,000 but needed another $150,000 to meet their minimum goal. "I'm not a salesman," admits Walter Lewis. "If I had it to do over, I'd let somebody else do the selling and I'd stay in the background as a scientist."
Given how hard it is to sell stock, entrepreneurs are exploring every alternative--including the Internet. Thanks to the success that a young company called Spring Street Brewery had with its Regulation A offering over the Internet, on-line DPOs have lately received plenty of press. But for many companies, the Internet may be more helpful at keeping down offering costs than at closing stock sales. When David Loring of Interactive Holdings, in New York City, did a Regulation A offering to fund his Internet and television-programming start-up, he naturally gravitated toward the Internet, since he could cheaply publish critical information there. Loring ran the business's offering circular on-line, along with legal contracts, sales material, registration forms, and company bylaws. He even posted advertising icons at other sites, such as on-line financial publications, that linked back to his home page. Since Loring developed the site himself, his Internet marketing effort cost less than $5,000 out of pocket.
Loring found that his Web site generated thousands of leads and lots of calls--but it took a human being to close most sales. That's not surprising, according to William D. Evers, a partner at San FranciscoÂbased Miller, Mailliard & Culver who has handled DPOs. "The Internet is merely a road sign on the highway. And nobody buys from a road sign," Evers explains. Nevertheless, Loring raised his required minimum and intends to finish his offering by year's end. He says, however, that next time he would hire a broker to handle the follow-up required to make sales. "Some people never have to go face-to-face with schoolteachers and tell them why they should hand over some of their IRA accounts," says Loring. "That's a big responsibility."
It should be. A DPO is the beginning of an organization's new business existence as a public company. After conducting DPOs, companies have to keep shareholders up-to-date, although mailed annual reports are sufficient for most small offerings. Then there's the sticky question of shareholder liquidity. Since many companies doing DPOs are too small to be listed on any national or regional exchange, they must find other mechanisms if shareholders are to trade stock. In reality, some operate more like companies that have conducted private placements: shareholders hang on to the stock until the company is sold, does a traditional public offering, or buys back the shares. Other companies maintain in-house matching services for buyers and sellers, and still others hire a broker-dealer to match orders. Larger companies may eventually be listed on public exchanges. More options are developing: the Pacific Stock Exchange, for example, has received SEC approval to build a SCOR Marketplace, where SCOR and Regulation A offerings will be traded.
It's too early to tell how all this SEC experimentation with small public offerings will pan out. Given how risky small companies are, it's an open question whether the bulk of DPO investors will end up satisfied--or furious. There's more than just business risk to worry about: as the number of companies selling stock directly increases, so do the possibilities for the kind of rampant consumer fraud and abuse that have plagued the penny-stock market. According to Joe Cella, chief of the SEC office of market surveillance, the SEC recently beefed up efforts to prowl the Internet, an area of particular concern.
Company owners also have to be careful, as David Whalley of Renaissance Design found out. Before he raised $550,000 for his $4-million Portsmouth, N.H., research company, Whalley says, he wasted seven months with a brokerage firm that assured him it was experienced in DPOs. When the brokerage's promises fell flat, Whalley and his partners ended up filing the offering themselves. "Make sure you're dealing with people who can prove they have done it before," he cautions.
Entrepreneurs also face a variety of often-conflicting state regulations. Jim Bernau, who has conducted 13 DPOs during the past seven years, has encountered his share of regulatory roadblocks while raising money for a vineyard and five microbreweries. He complains that, in one state, he twice didn't get approval until two weeks before the offering closed. Meanwhile, one state official demanded that certain information be included in Bernau's prospectus at the same time the counterpart in another state forbid its inclusion. "Lots of states have lotteries, with no control of how much people invest," Bernau gripes. "And here I am with an army of attorneys and accountants going through a regulatory process that takes eight months, just to raise $700 to $900 each from beer enthusiasts to build a brewery."
