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Off-the-Grid IPOs

An underused SEC exemption that deserves another look.
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In some respects, it wasn't such a terrible problem for Martin Lightsey to have: The value of Specialty Blades had increased so much since he founded the medical and industrial blade manufacturer in 1985 that some of the company's 11 shareholders, including Lightsey's two daughters, wanted to cash in some of their earnings. In 12 years, the median $42,000 investment in the business, based in Staunton, Virginia, had soared to a value of more than $350,000. The problem was, Lightsey didn't have enough cash to fund the buyouts.

Lightsey briefly toyed with the idea of going public, which would allow his investors to buy and sell shares as they pleased. He called Gordon Smith, a securities lawyer at Richmond law firm McGuire Woods, who told him that the legal and accounting fees related to being a publicly held company would amount to roughly a half million dollars every year, overwhelming for a business booking $6 million in annual sales.

Lightsey asked Smith about a privately held community bank in Staunton that seemed to be trading its shares. Smith explained that the bank was taking advantage of a little-known Securities and Exchange Commission exemption called an intrastate offering, which allowed it to sell stock to Virginia residents without registering with the SEC. It seemed like a perfect solution for Specialty Blades: Lightsey could cash out the company's current investors by selling their stock to a new group of shareholders and avoid the hassle and expense of an IPO. At the same time, he could spread out ownership to a larger, more diverse pool of investors. "The public model is just more stable," Lightsey says.

Intrastate offerings allow privately held businesses to create small local stock exchanges by selling shares to residents of a single state. Companies issue shares to investors through investment banks or brokerage firms, which then handle ongoing trading between interested buyers and sellers. To qualify for the exemption, a business must be incorporated in the state where it is making the offering and carry out the bulk of its operations there. The offerings also must comply with state securities laws, also known as blue-sky laws, which vary by state and may limit the number of shares a company can issue. As long as the company has less than $10 million in assets and fewer than 500 security holders of record, it is exempt from filing reports to the SEC.

The intrastate offering exemption has been around for years. But few businesses are taking advantage of it. In Virginia, for example, only seven such offerings have been made since 2001, according to the Virginia Corporation Commission. One explanation may be the exemption's rigid residency requirements: If a single share of a business is sold to a nonresident, or traded within nine months of the offering to someone living in another state, the entire transaction could be voided and the issuer could be forced to buy back all of the shares sold in the offering.

After the conversation with his lawyer, Lightsey spent the next few months researching intrastate offerings before deciding to take the plunge. His first step was to convert Specialty Blades from an S corporation to a C corporation, which would permit the company to take on an unlimited number of shareholders. Next, Lightsey began working with Bruce Campbell, then executive vice president of Richmond brokerage firm Scott & Stringfellow and a Specialty Blades board member who owned several thousand shares of the company. Campbell and some fellow board members estimated a value for the company's stock, based on factors such as cash flow and earnings, and began contacting clients to gauge their interest. Many of them were Staunton residents who were familiar with Specialty Blades and seemed enthusiastic about the novelty offering.

A few months later, in early 1999, Lightsey held a gathering at Specialty Blades' facility for 40 potential investors, half of whom he knew from church and other community gatherings. As the group sipped wine and eyed the glittering sample blades hung on the walls, Lightsey cautiously launched into his dog-and-pony show, highlighting the company's history and growth strategy. A few weeks later, investors purchased a total of 30,000 shares at $20 per share, which represented 6 percent of the company. All of the shares that were sold belonged to Lightsey's daughters, who used part of the $600,000 in proceeds to pay off their mortgages. The offering cost Specialty Blades about $15,000, a small fraction of the price of an IPO.

People now can buy and sell Specialty Blades stock by contacting Scott & Stringfellow, which charges a fee of 65 cents per share for each transaction. The firm regularly updates the stock price, which was recently $62 per share, not accounting for a 2-for-1 stock split in April. Scott & Stringfellow ensures that the company stays in compliance with SEC regulations by verifying that each interested buyer is a resident of Virginia. The firm also acts as a pitchmeister for Specialty Blades stock. "The key is to get an investment banker who gets your story and will sell it," Campbell says.

During the past seven years, Specialty Blades has made two more intrastate offerings, which has allowed it to buy out existing shareholders and further diversify its investor pool. The company, which generated $15 million in revenue last year, now has 200 registered owners and a market capitalization of $33.9 million. Lightsey, who now owns 5.6 percent of the company, holds an annual shareholder meeting to keep them up-to-date. "We call it a creeping IPO," Lightsey says.

Of course, Specialty Blades is likely to run out of potential new investors at some point. So far, most of the company's shareholders are Staunton residents who feel comfortable taking a gamble on a local business. Once that pool is tapped out, it may prove difficult to drum up investors in cities farther afield. For now, however, Specialty Blades has the opposite problem: a long waiting list of eager buyers but no sellers. Meanwhile, Lightsey has been shopping around for an acquisition. If he finds a suitable target, he may make another intrastate offering, selling as much as $10 million in new shares, to finance the purchase. He also plans to keep a keen eye on the SEC's 500 shareholder limit. "We want to avoid SEC reporting like the plague," he says.

Resources

Check out www.inc.com/handson for more information on intrastate offerings, including links to detailed explanations of the rules and regulations governing the exemption on the website of the Securities and Exchange Commission.

A few months later, in early 1999, Lightsey held a gathering at Specialty Blades' facility for 40 potential investors, half of whom he knew from church and other community gatherings. As the group sipped wine and eyed the glittering sample blades hung on the walls, Lightsey cautiously launched into his dog-and-pony show, highlighting the company's history and growth strategy. A few weeks later, investors purchased a total of 30,000 shares at $20 per share, which represented 6 percent of the company. All of the shares that were sold belonged to Lightsey's daughters, who used part of the $600,000 in proceeds to pay off their mortgages. The offering cost Specialty Blades about $15,000, a small fraction of the price of an IPO.

People now can buy and sell Specialty Blades stock by contacting Scott & Stringfellow, which charges a fee of 65 cents per share for each transaction. The firm regularly updates the stock price, which was recently $62 per share, not accounting for a 2-for-1 stock split in April. Scott & Stringfellow ensures that the company stays in compliance with SEC regulations by verifying that each interested buyer is a resident of Virginia. The firm also acts as a pitchmeister for Specialty Blades stock. "The key is to get an investment banker who gets your story and will sell it," Campbell says.

During the past seven years, Specialty Blades has made two more intrastate offerings, which has allowed it to buy out existing shareholders and further diversify its investor pool. The company, which generated $15 million in revenue last year, now has 200 registered owners and a market capitalization of $33.9 million. Lightsey, who now owns 5.6 percent of the company, holds an annual shareholder meeting to keep them up-to-date. "We call it a creeping IPO," Lightsey says.

Of course, Specialty Blades is likely to run out of potential new investors at some point. So far, most of the company's shareholders are Staunton residents who feel comfortable taking a gamble on a local business. Once that pool is tapped out, it may prove difficult to drum up investors in cities farther afield. For now, however, Specialty Blades has the opposite problem: a long waiting list of eager buyers but no sellers. Meanwhile, Lightsey has been shopping around for an acquisition. If he finds a suitable target, he may make another intrastate offering, selling as much as $10 million in new shares, to finance the purchase. He also plans to keep a keen eye on the SEC's 500 shareholder limit. "We want to avoid SEC reporting like the plague," he says.

Resources

Check out www.inc.com/handson for more information on intrastate offerings, including links to detailed explanations of the rules and regulations governing the exemption on the website of the Securities and Exchange Commission.
Last updated: Dec 1, 2006




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