Despite all the problems, DPOs can be useful vehicles for small-scale companies to acquire equally small-scale investors. When Joe Murphy, president of Community Grocers, in Mount Ayr, Iowa, needed to fund his grocery-store start-up, he rallied the local community around his cause--and his DPO. A huge grocery chain had bought and later shut down its only competition in town, and that stirred resentment. "We marketed by asking people if they were interested in having another grocery store," says Murphy, who hired someone to cold-call people with that question. If residents said yes, the caller launched into the offering pitch. Murphy also relied on his 13-member board to spread the word. "It was a small-town deal," he says. "The big corporation had a negative impact when it turned us into a one-store town. People would give money to stop that."
Lots of money, it turns out. In July of this year, Community Grocers was still short on cash, so the board asked backers to either increase their investments or ask friends to join. Five weeks later Murphy had doubled his capital and his investor base. Community Grocers' offering won't be finished until February, but with $385,960 in September, the company had already raised its required minimum--in exchange for 62% of its stock. In the 5,400-person county, more than 300 are investors, which Murphy says carries an added benefit. "It's not mandated that they'll become customers. But if you're deciding between grocery stores and you own stock at one of them, chances are, you'll go there."
It's too soon to tell if Murphy's start-up will succeed. In that respect, Community Grocers' offering is like DPOs themselves: an unusual financial experiment where the worlds of Wall Street and Main Street, of stock sales and produce sales, intersect. In the long run, DPOs may prove to be a passing business fad--or an important source of small-business capital. For now, we can only wait and see.
Source: Tom Stewart-Gordon, the SCOR Report, Dallas.
| What Is a Direct Public Offering Anyway? |
| Most common types |
RULE 504 UNDER of DPOs REGULATION D (SCOR) |
REGULATION A |
INTRASTATE |
| Brief description |
A small corporate offering |
A short form of registration for a small public offering |
An offering of securities restricted to one state |
| Also known as... |
SCOR, ULOR, or U-7 |
Reg. A |
Rule 147 |
| Maximum offering |
$1 million |
$5 million |
No federal limit; amount varies by state requirements |
| Time period |
12 months |
12 months |
No federal limit; varies by state requirements |
| SEC requirements |
Filing of form D |
Offering statement must be filed with the SEC |
None, except can't resell outside state for nine months |
| State requirements |
State registration |
State registration |
State registration |
| Interstate offering possible |
Yes |
Yes |
No |
| Filings last year* |
145* |
77 |
10* |
| General solicitation and advertising allowed? |
Yes |
Yes |
Yes |
| Restricted to accredited investors, who meet certain wealth standards? |
No** |
No** |
No** |
| *There were 21 additional filings whose category could not be easily determined. They were either SCORs or intrastate offerings. |
| **One exception: California allows only accredited investors to invest $2,500 or more in a DPO. |
Checklist: Could You Do a DPO?
Drew Field, a specialist in direct public offerings, has identified some of the most common characteristics of companies that conduct successful DPOs. Does your company share them?
1. Does your company have a history of consistently profitable operations under the present management?
2. Is your company's present management honest, socially responsible, and competent?
3. In 10 words or fewer, could you explain the nature of your business to laypeople new to investing?
4. Would your company excite prospective investors, making them want to share in its future?
5. Does your company have natural affinity groups, such as customers with strong emotional loyalty?
6. Do members of your natural affinity groups have discretionary cash to risk for long-term gain?
7. Would your company's natural affinity groups recognize your company's name and consider your offering materials?
8. Can you get the names, addresses, and telephone numbers of affinity-group members, as well as some demographic information on them?
9. Can a high-level company employee spend half-time for six months as a DPO project manager?
10. Does your company have--or can you obtain--audited financial statements for at least the last two fiscal years?
