The bottom line: the pure Internet DPO is largely unexplored territory. On the other hand, three years from now it will probably seem like old hat, with thousands of small companies competing for investors' attention. The ideal moment to strike will probably lie somewhere between now and then--and your guess is as good as anyone else's.
If there's a shadow hanging over the on-line DPO market, it's that being cast by securities fraud. Traditional stock offerings are heavily scrutinized by brokers and the SEC; typically, no one does due diligence on a DPO. DPOs that take place entirely on the Internet are ripe for con artists for the same reason that they are so appealing to legitimate companies: they are quick and cheap to set up. The SEC has charged 83 individuals and companies in the past year with Internet securities fraud, 26 of them for hawking entirely fictitious deals. Two years ago a company called Interactive Products and Services (IPS) Inc. rolled out a DPO to develop WebTV products; the offering was listed entirely on the Internet. IPS pulled in about $200,000 from small investors before California officials shut the operation down as a scam and sent its CEO to jail. Not surprisingly, con artists have figured out the kind of leverage they can achieve via the Net. In my search for offerings, I came across hundreds of bulletin-board investment solicitations in almost comically fishy-sounding ventures ranging from gold mines to magazines for "exotic models." But only the most naïve investors would be taken in by those sorts of come-ons. On the other hand, what to make of a company like Fonecash.com? Listed on Direct Stock Market (DSM), a Web site that specializes in listing DPOs and private placements, as a developer of a credit-card-transaction-processing device, Fonecash.com is floating a $990,000 DPO. The Fonecash.com Web site consists of an "under construction" notice, and the company had not returned phone calls by press time. Another DSM-listed company, Specialized Autocore Services Inc., also failed to respond to a request for information, and the phone number of a third company on the site, the Gourmet Source Inc., yielded a "no longer in service" message. Investors aren't likely to throw their money into an operation that doesn't even answer its phone.
In mid-1996, Ed Palmer decided to run a little test, putting up on the SolarAttic Web site the prospectus from his 1994 stock offering. Sure enough, he started getting E-mail requests for more information. By the end of 1997, his new offering was in place on the site.
SolarAttic now had a better picture to present to potential investors. The company's sales-growth rate was close to 80% and accelerating hard. A pool dealer in Arizona signed on as the first official SolarAttic regional dealer.
But once again Palmer found himself facing off against state regulators. The offering met with relatively little resistance in Connecticut, New Jersey, and Rhode Island. Palmer also painlessly tacked on Delaware, Arizona, and Colorado because those states require almost no paperwork, provided that a company is going after only a limited number of accredited investors. But Wisconsin, representing seven midwestern states that allowed pooled registration, dictated that a minimum amount of money be raised. The funds had to go into escrow until the minimum was met; if not, the money had to be returned to investors. California refused to accept the filing as a SCOR offering, instead requiring that Palmer fill out a long questionnaire that addressed the same information. The Nebraska Department of Banking and Finance sent Palmer a letter threatening criminal prosecution for violating a state law against unregistered solicitation of funds because of the Web site, even though the site clearly stated that Nebraska residents were not eligible. But it was Minnesota regulators who again seemed to set out to prove themselves the pit bulls of the DPO world, demanding that the company set up an "independent, disinterested" board of directors and even issuing a stop order against the offering.
Reflecting on those and other state regulatory hassles sends Palmer into a Lenny Bruce-like rant. "These regulators were engaging in illegal activities," he fumes. "They were breaking their own laws. How is a company supposed to put together a disinterested board? Is that an oxymoron, or what?" He churned out a press release accusing one Minnesota regulator of imposing several illegal requirements on SolarAttic. And he ended up dropping most of the rule-mongering states from his offering. Palmer claims the battles with Minnesota regulators cost him in excess of $90,000 in legal fees and his time, and set the company back years. "The SCOR rules were supposed to make it easy for small businesses to go public," he says. "It's supposed to be uniform, but each state lobs its own preposterous things at you. They say it's to protect the public from crooks, but crooks don't care about the rules. It may seem strange to hear this from a small-business owner, but I wish the federal government would take over the regulation of these things."
When the regulatory hassles were finally behind him, Palmer started to focus on driving potential investors to his Web site. He started by analyzing statistics that told him where visitors were coming from and what they were doing when they got to his site. For example, 9% of visitors came to the site from a Yahoo search, and of those, 38% had included the word solar in their search, versus only 3% who had used accredited. Only 2.5% of visitors were examining the offering "tombstone," and eight times as many visitors were downloading technical manuals as were downloading prospectuses. Conclusion: Yahoo searches were a great potential source of referrals, but they were sending over mostly potential customers, not investors.
In light of that information, Palmer decided to sign up for a $4,500 banner ad with Yahoo. The ad would be displayed at the top of the search-results page whenever someone asked for such investment keywords as IPO, DPO, SCOR, and so on. But after studying stats revealing that after 20,000 showings the banner had enticed only 200 people to click to the SolarAttic site, Palmer discontinued the ad. Next, he contracted for 50,000 page views of an ad for his offering with the Wall Street Journal Interactive Edition--ads that, he says, would be shown only to the site's 18,000 subscribers in New Jersey, Connecticut, and Rhode Island. But again, the results were disappointing: 200 hits, after subscribers had been exposed an average of three times each to the ad. "I realized that people don't want to be distracted by banner ads when they're on-line looking for information," says Palmer. "It doesn't make sense to pay thousands of dollars for 200 hits when I can generate 300 hits from a $90 Business Wire press release."
