Drew Field
Direct Public Offerings

Working Woman
June 1996


When multimillion dollar companies want to go public, they announce their stock offerings in the Wall Street Journal. When Annie's Homegrown wanted to go public, it stuffed coupons in boxes of its macaroni and cheese.
The coupons are Annie's primary way of telling the world about its direct public offering (DPO), an equity-financing tool that's quickly catching on with small businesses. If all goes as planned, by the time the yearlong offering ends in August, the Hampton, Conn.-based firm, with nearly $4 million in annual revenues, will have raised $3.6 million. In the past three years, 560 small businesses have gone public without the help of an investment bank, up from 189 between 1989 and 1992, according to the North American Securities Administrators Association. There are plenty of obstacles facing small businesses that want to go public in the traditional way. For starters, landing an investment banker willing to underwrite a stock offering under $10 million is nearly impossible. And the cost of most IPOs is about 13% of what a company expects to raise. By contrast, Annie's offering should cost the firm just 7%, or $250,000.
But there are drawbacks to DPOs as well, especially for investors. For one thing, DPO shares are often highly illiquid. Until they are listed on an exchange, transactions usually have to be arranged by the company or by a company-appointed broker who tracks down and matches buyers and sellers. Companies that don't raise the minimum amount specified in the prospectus must return investors' money. (Through 1995, 30% of firms that filed offerings met their minimum goals, up from 20% in 1994, reports Tom Stewart-Gordon, publisher of the Dallas-based SCOR Report, a newsletter that tracks DPOs.)
Still, many companies love the patient, loyal shareholders that DPOs attract, says Drew Field, a securities lawyer and author of Take Your Company Public: The Entrepreneur's Guide to Alternative Capital Sources. That kind of support is a godsend for young companies feeling growing pains," he says.
Besides Annie's, small businesses that have taken a fancy to grassroots public offerings include Frenchtown, NJ.-based Blue Fish Clothing, Hopland, Calif's Mendocino Brewing Company, Spring Street Brewing in New York City, which is selling its shares via the Internet, and Real Goods Trading, an environmental-products cataloger in Ukiah, Calif.
And some companies graduate from DPOs to the big leagues. Mendocino Brewing, which last year raised $3.6 million through ads placed in its six-packs, is now listed on the Pacific Stock Exchange. Hey, how about some macaroni and cheese to go with that beer?

By Kerry Harmon