In which Chris Reed, the founder of a soda company, undertakes an initial public offering -- his way. What can go wrong does. What should go right doesn't. Five painful years pass. As the man himself says, "You have to work hard to create that much trouble."
The Don't-Do-It-Yourself IPO
Even before he wrote this letter, Chris Reed had never had much of a taste for authority or for other people's restrictions. Sure, it was aggressive to promise that he would be on the OTC board within nine months. But he was an iconoclast, an outlaw in this business world of rules and paperwork. He had been ever since he started his little natural-soda company, Reed's, from his kitchen, in Venice Beach, California, in 1987. Back then he was a burnt-out chemical engineer who had taken a sales job at 1-800-Dentist while trying to conjure up a company. He liked the taste of ginger, and while studying herbs, as one tends to do in Venice Beach, he learned that ginger soothed stomachaches and motion sickness. He began brewing a spicy ginger beer and tinkered with the concoction for a couple of years. Once the brew satisfied him, he bought 90 pounds of ginger, cut it up by hand, and threw it in the back seat of his Volkswagen Bug. He drove to a local brewery to borrow a vat and used a canoe paddle to mix the ginger with water, roots, and spices. He poured that into some bottles, slapped on some labels, and drove the Bug to health-food stores, delis, and a Philly cheesesteak joint to sell test batches. Then he stuffed some bottles into his backpack and wandered to the Natural Foods Expo West 1990, where a couple of big distributors liked his product and signed him up. He was in Whole Foods by the end of the year.
He had no idea that that 1999 letter would kick off an extended entanglement with the very people he was trying to avoid: the lawyers, the bankers, the regulators, the state officials, the people who believed in rule books and orderly procedures. By the time he wrote the letter, Reed's had revenue of $4.2 million, and Reed wanted to buy an L.A. warehouse and turn it into a brewery. He decided to raise the money through a special, non-IPO offering for small businesses called a Small Corporate Offering Registration, or SCOR, which lets companies sell up to $1 million worth of stock to the public without having to go through Securities and Exchange Commission reviews. As his hippie heroes at Ben & Jerry's had, Reed used his products to sell shares: He hung neck tags on his bottles and invited customers to become owners at $2 a share. "He's like, 'Aah, nobody's gonna have any faith in me, but I'll peddle it around and maybe make something of it,' " says Peter Sharma, who met Reed at a gathering for the Hindu guru Sri Sri Ravi Shankar around that time. The SCOR was a modest effort--after Reed brought in, then fired, a couple of penny-stock hawkers to manage the calls, he handed investor relations over to Kristie Hannum, his shipping and receiving clerk. Nine months into the 12-month offering, Reed had raised only $50,000 and was about to shut it down. Then Sharma, a onetime actor who had trained himself as a stockbroker, offered to help. "I said, you got 50 grand in from shysters and your shipping clerk," Sharma says. "It's working in spite of the fact of everything being wrong." Reed and Sharma printed thousands more neck tags and brought in $900,000 and 179 investors in those final three months. The whole thing cost Reed $20,000.
Reed ran through the SCOR money quickly and kept going. In 1999, with a $250,000 loan from his father, he bought a root-beer company called Virgil's for $371,000 down and $100,000 a year for five years. The next year he picked up a licensee called China Cola in exchange for 130,000 shares of stock plus 75 cents per case sold for two years. He added an ice cream, a cherry-flavored ginger drink, and ginger candy to his product line. And in December, he finalized the purchase of that 18,000-square-foot warehouse for $850,000 with a Small Business Administration loan. Searching for more cash but wary of big investors, hostile to the control that venture capitalists wanted, and too busy to put much time into researching other options, Reed decided to put together an initial public offering.
The thing about Reed is that although he's pure hippie on the outside, with his frizzy graying hair and psychedelic T-shirts with his little potbelly underneath, his belief in the properties of ginger, his refusal to kill the ants in his office (he had an infestation once; he drew a line with ginger root to ward them off), he's actually pretty rigid. His father was a U.S. Army colonel, if that has something to do with it, and Reed was going to attend West Point before a slight heart murmur sent him on a different path--to chemical engineering, then a world-music band, spirituality, and natural sodas. So when he decided to do the public offering, to go for the big time and raise $18 million, Reed wanted to do it his way. And his way of doing an IPO was to avoid the ridiculous fees and regulations of Wall Street and its associated lawyers and accountants and document processors, to deal cleanly and directly with the SEC, to do it all fast and cheaply. He was thinking $250,000, start to finish.
That frizzy hair is graying only now, it should be mentioned; when this process started, it was brown. Looking back onhis IPO debacle, Reed says, "You have to work hard to createthat much trouble."
Reed filed his first attempt at a prospectus before he had even lined up an underwriter, because everyone he had looked at was charging a fortune. "The broker-dealers wanted $800,000 just to have their name on the cover, and we were like, 'To hell with that,' " he says. He decided he would save money by buying a broker-dealer--a function that is presumably noncore to a soda company--rather than paying one to sell his stock. "Is that nuts, or what?" he says. Sharma found a broker-dealer up in Washington State called Blue Bay. Blue Bay's owner, Dale Garnett, didn't want to sell his company to Reed, but he agreed to let Sharma sell under Blue Bay's auspices, and also to take a lower commission. "There's not many people who could claim this level of creative financing," Reed says.
