The SEC, however, is not a big fan of creative financing, as became evident when Reed received its responses to his first-draft prospectus. "Oh, my God, it was hell," he says. "Because we were pushing all their buttons, and we didn't even know it." He wanted to market the stock over the Internet, and "there were so many questions as to the legality of it; it was a whole new thing for them. So the fact that we mentioned we were going to do most of our marketing, or even giving prospectuses and subscription documents, through the Internet, it was just ridiculously stupid." Reed clung to his approach, though, which meant it took more than a year and 13 amendments before he got the document approved, at the end of 2002. "I think it was the last five minutes of this guy's day," Reed says. "We finally get him on the phone. We did beg, and we were on our knees, and finally he did let it go forward. And it was hell."
Cleared on December 31, 2002, the $18 million offering valued Reed's at $46.3 million--a stretch, given that in the first three quarters of 2002, the company's sales were only $3.3 million, and it was losing money. Reed was expecting results like those he had had with the SCOR, but by the first quarter of 2003, he had sold no more than $10,000 worth of shares. Blue Bay's Garnett says, "Part of the arrangement was Peter was going to be in charge of all the selling, and he didn't sell any"; Sharma blames it on Reed's putting out very little promotional material; Reed thinks the IPO market was bad because of the looming invasion of Iraq.
The indifference of investors was bad, but what was even more aggravating for Reed was learning he would need to have his10-K--the company's annual financial statement--audited by the end of March, and that it would cost around $50,000. Says Sharma: "He doesn't want to pay another $50,000 to his accountants up there in Oxnard; by now he's spent half a million dollars on this offering [Reed says it was more like a third of a million, with the money going to audits and lawyers' fees], and he says, 'You know what? I'm going to pull the offering.' " Reed returned money to everyone who had bought shares and began the withdrawal process. He was tired. "Management was me," he says. "I was the CFO, CEO, COO. So management was pissed and upset and saddened and bent down and frustrated and everything else. It was not an easy decision."
It wasn't such a mess, Reed figured. Ignoring what he had learned so far about the SEC's flexibility, he reasoned he could resume the IPO when the markets looked better and be quickly cleared by the SEC. A little over a year later, he decided it was time. By then, summer 2004, his numbers were good: Sales for the first half of the year were $4.5 million, on track to beat 2003's sales of $6.8 million. His loss for those six months was just $38,037, a fraction of the almost $500,000 he had racked upsix months into 2003. And the public markets seemed to be supporting natural-soda companies. Jones Soda was trading at$4.10 in July, up from around a dollar a year prior, and Hansen's, which had opened the year at $8.43, was up to $24. Plus, business was strong. He was still in Whole Foods (NASDAQ:WFMI), as well as Costco (NASDAQ:COST) and Trader Joe's, and he had started a direct distributor that got him into movie-studio commissaries, mom-and-pop groceries, and industrial food-service chains. Reed had just raised $334,400 ina private placement to cover offering fees, and he startedupdating his old prospectus. "We went through hell to clear the last one," he says. "You'd think it would be easy sailing only a year and a half later."
This time, Reed decided to line up a broker-dealer before he filed. He charged Sharma, who by now had a board position at Reed's, with finding one. Sharma chose Brookstreet, a firm with a mottled past and several National Association of Securities Dealers, or NASD, violations. Sharma liked Brookstreet's owner, Stan Brooks, and was comforted by the fact that he employed several family members. Sharma figured Brooks wouldn't staff up with his own family if he wasn't running a legitimate operation.
Reed, meanwhile, had forgotten another lesson, this one concerning his record as an independent researcher on stock offerings. He knew that unless a company is big enough to list on the major exchanges, it has to clear its offering with the SEC and with the regulators in each state in which it plans to sell. Reed could easily have chosen a few states to focus on. But an Internet investigation led him to what he thought was another money-saving shortcut, something called a coordinated review. With this, two states--in his case Pennsylvania and Delaware--would take the lead in amassing and coordinating comments from the 28 other states in which he wanted to sell. (He chose the 30 states by excluding those that were "obnoxious with their fees," meaning they required a $2,000 or $3,000 filing fee, and some, such as Arkansas and Wisconsin, he "just dissed.")
Reed was already getting worried about the cost by the time he submitted his first filing to the SEC, in November 2004, offering two million shares at $4 a pop and giving the company a putative value of $26.9 million. His worries spiked immediately. All documents submitted to the SEC need to be in a peculiar format customized for the SEC's Electronic Data Gathering, Analysis, and Retrieval database, or EDGAR. Financial-publishing firms "Edgarize" documents for a fee, and Reed's lawyer instructed Reed and Sharma to meet him at one of these firms, called Bowne, on the day of their first filing. "We go there, and there are billiard tables and swanky chairs and fully stocked bars and a butler and a runner who will run anywhere to get anything for you, and it's beautiful and sumptuous, and I'm like, 'How much does this have to cost?' " Sharma says. Reed was furious--especially after he was slapped with a $21,000 bill for his four-hour sojourn. He refused to pay Bowne, despite frequent collection calls. "We told them they were obnoxious; we said, 'You're not gonna get a cent,' " Reed says. (He eventually paid Bowne around $18,000.)
