Drew Field
Direct Public Offerings

The Wall Street Journal
May, 1996
By Steven E. Levingston

Tiny Firms Offer Stock 'Direct' to Public

Annie's Homegrown is no ordinary macaroni-and-cheese firm. Each box of its pasta shells and cheddar cheese features a portrait of the owner's dearly departed pet rabbit, Bernie. The company donates 1% of gross sales to community programs and encourages customers to write for a free "Be Green" bumper sticker.
So when Annie's decided to launch a public share offering last year, it wasn't surprising that the Chelsea, Mass., company balked at using expensive Wall Street underwriters in pinstripes. It sold the shares "direct" to the public.
Annie's joined a movement of small companies that sidestep Wall Street when they offer shares. Last year, about 40 companies completed direct public offerings, up from about 28 the year before, says Tom Stewart-Gordon, a Dallas expert in small-business financing.
Interest in direct offerings "is increasing tremendously," Mr. Stewart-Gordon says. "It's like the four-minute mile: Once somebody does it, everybody will do it."

Liquidity Problems

But although these do-it-yourself offerings allow people to participate in share-holding who might not otherwise, analysts warn investors to avoid leaping in blindly. These shares often lack liquidity (or the ability to trade easily). Only a few direct offerings trade on exchanges and when they do, the volume is small. Some shares find their way onto the National Quotation Bureau's daily "Pink Sheets" and the Nasdaq's OTC Bulletin Board. Others are traded privately among investors linked up by the companies themselves or through order-matching services at broker dealers.
Though direct offerings must satisfy the Securities and Exchange Commission's filing rules, they don't undergo the additional rigorous scrutiny of an underwriter. What's more, few Wall Street analysts keep regular tabs on the companies' development, so investors need to educate themselves for their own protection.
Companies that have used direct offerings concede the limited liquidity of their stocks made it difficult to sell their issues. "Small investors want liquidity," says Joseph Meshi, executive vice president of Genovation, an Irvine, Calif., maker of keypads for notebook computers. "If Suzie gets sick, the doctor has to be paid." Genovation, whose sales total about $4 million, failed in its bid to raise $970,000 in 1993. Mr. Meshi blames both the absence of a stock exchange listing and of a clearly identifiable customer base.

'Very Poor' Odds

"If you're a catalog company with 100,000 subscribers where you can promote to them free, or a microbrewer with a loyal following, you might be successful," he says. "But if you're an industrial company the odds are very poor."
Companies that launch successful offerings are often quirky and idealistic, with devoted customers. Consider Blue F'1sh Clothing, a maker of hand-painted clothing in Frenchtown, N.J., that uses organically grown, pesticide-free cotton. "I don't know if people are investing in us so much for the return," says public relations director Ta Kimble. "It's because they believe in what we're doing." The company completed its direct offering last week, raising more than $4 million. The stock now trades on the Chicago Stock Exchange.
Certainly, investors have been attracted to Hopland, Calif.'s Mendocino Brewing as much for its products as for the return on its stock. "There's a lot of emotional attachment in a brewery," says Michael Laybourn, chief executive officer. The company, which raised $3.6 million for a new brewery last year, trades on the Pacific Stock Exchange in San Francisco. Its shares, sold initially at $6 each, shot up after their listing to 13 but have since settled to around 8. Mr. Laybourn is optimistic about the stock once the new brewery comes on line in September, which will help satisfy demand for its handcrafted beers including Red Tail Ale. Mr. Laybourn predicts that with the increased brewing capacity sales will triple from $3.7 million in 1995.

Selling Independence

Real Goods Trading, a Ukiah, Calif., catalog company selling alternative energy products, tapped its customers twice, in 1991 and 1993, raising $4.6 million through direct offerings. "We sell renewable energy, energy independence, independent life styles," says Real Goods' president, John Schaeffer. "Akin to that is buying your investments independent of brokers and investment bankers."
Investors swarmed over the company's second offering of $3.6 million at $6 a share. The enthusiasm continued after the shares were listed on the Pacific Stock Exchange at 8. The price shot up as high as 16 but now hovers around 6. Mr. Schaeffer cites hard times for catalogs in general because of high paper prices.
To create a well-regulated secondary market for direct offerings, the Pacific Stock Exchange spent the past three years working with state and federal regulators on special listing rules. The exchange hopes to open a market for these shares later this year. Each stock will be allocated to a specialist on the floor-"to have these little stocks trade alongside IBM, GM and the rest of them," says Dale Carlson, spokesman for the exchange.

A Free Pint

But some companies attract enough investors without an exchange listing. Port-land Brewing in Portland, Ore., raised about $7 million in four direct public offerings from 1985 to 1995. In its first offering of $125,000, the company promised share-holders a free pint of beer a day at the brewery. In 10 years, shareholders have grown to about 6,000 from 50. "We still offer the free pint, but at some point it might be too unwieldy," says Shannon Novak, vice president for shareholder relations. We don't promote it anymore, but a lot of the time that's what people hear about first.
The stock is so popular that Ms. Novak has a waiting list of 400 investors. When someone wants to sell, she puts the shareholder in contact with a potential buyer. The price is determined by the two investors and sometimes results in wide variations. For instance, on May 9 two sales were privately negotiated: $7 a share in one case, $12 in another.
Some companies market their shares through their products. Annie's Homegrown stuffed coupons for a prospectus into its macaroni-and-cheese boxes and provided the entire document for down-loading on its Internet web site. Mendocino Brewing included notices of its offering with its six packs. Real Goods Trading promoted its shares in its catalogs.
The Internet is proving an especially hot avenue for marketing of direct offerings. Andrew Klein, founder and president of Spring Street Brewing, New York, discovered a wider audience than he had anticipated for his $1.6 million offering, publicized last year on the Internet. "The general belief was that if I could reach out to my beer customers, they'd be a good pool for potential investors," he says.