Los Angeles Times
By Jane Applegate
A Financing Plan Based On Loyalty
Do your customers love your products?
Then maybe they love your company enough to invest in it.
Small, growing companies with loyal customers are likely candidates for an alternative
form of financing called the direct public offering, or DPO.
Ninety-five percent of the people who participate in a DPO don't have a broker and have
never bought shares directly in a company, says Drew Field, a San Francisco securities
lawyer who has been putting together DPOs for clients since 1976.
That's in contrast to the more common initial public offering, or IPO, which works best
for a fast-growing company that can afford the services of an investment banker, brokers
and a full public relations effort Field, who charges a fee for his services rather than
taking a piece of the deal, cautions that DPOs are not for start-ups. They work best for
successful companies with devoted customers, or "affinity groups," as he calls
Successful DPOs take about a year to complete, requiring an investment of both time and
money. Company owners and managers usually market the stock directly to customers, usually
Many successful DPOs are launched by companies involved in selling alternative products,
such as natural foods and energy-conservation products.
For example, a DPO launched by Annie's Homegrown, a pasta maker in Chelsea, Mass., is in
the process of raising about $1 million. The average stock purchase is about $580, said
Field, who is helping the company with the deal. The company let its customers know about
the offering by putting a message in boxes of macaroni.
This down-home approach works well for companies with a strong commitment to customer
You can't have a better customer than someone who owns the company," says John
Schaeffer, president and chief executive of Real Goods Trading Corp in Ukiah, Calif.
Schaeffer, who hired Field to help raise nearly $4 million in two DPOs, is a true believer
in the process. The 10-year-old Real Goods sells energy and conservation products through
catalogs and at a handful of retail stores. The company, which employs about 100, recently
opened a 12-acre Solar Living Center in nearby Hopland to demonstrate its products in
For the fiscal year ended March 31, Real Goods posted $15.4 million in revenue and a net
loss of $175,000 attributed to increased recycled paper prices.
On July23, Real Goods began selling its shares on the Nasdaq SmallCap Market-good news for
investors seeking more liquidity for the stock, which has been selling at$6.50a share in
Despite a few solid DPO successes, the market for DPOs remains small "DPOs haven't
reached critical mass yet because not enough people know about them to make a
market," said Tom Stewart-Gordon, publisher of the SCOR Report, a Dallas-based
newsletter that tracks small corporate offerings.
Another problem: "The quality of the deals is spotty, and some deals are not very
good," Stewart-Gordon said.
Still, in 1995, 40 companies raised the funds they set out to raise, compared with 28 in
1994, he said. Figuring out exactly how much money is raised through these small offerings
is tough, Stewart-Gordon said, because although companies file a form with the Securities
and Exchange Commission, no one tracks completed offerings.
Stewart-Gordon expects 300 companies to launch small stock offerings in 1996.
One of the smallest DPOs in history raised $470,000 for Hahnemann Laboratories Inc., a
homeopathic pharmacy in Albany, Calif. Founder and President Michael Quinn said he turned
to his customers for help because he didn't have the money needed to build an FDA-licensed
laboratory. The company produces natural homeopathic remedies, which are considered an
alternative to synthetic prescription drugs.
Quinn, a former hospital pharmacist, sent 30,000 letters to people on his mailing list. He
sent a prospectus to 2,100 people who asked for the information. Of those, 242 ended up
investing slightly less than $2,000 'each. At this point, they can sell their shares only
if they can find someone to buy them. However, Quinn said he's trying to find a broker
willing to make a market for the shares.
The company, which has 14 employees, reported revenue of $673,000 for the year ended June
30, compared with $580,000 in fiscal 1995.
The new lab, under construction in San Rafael, will cost about $200,000-money available
from the DPO. Quinn said legal, accounting, printing and postage costs for the offering
were about 103,000, but that it was money well spent.
"It's worth the time and money it takes if you are totally committed to the work
you're doing, " Quinn said.