Drew Field
Direct Public Offerings

April 1997
By Lorrie Grant

Small firms take direct route to stock offerings

A growing number of small companies that want to raise money from the public are bypassing Wall Street investment bankers in favor of a do-it-yourself approach.
Using what is called a direct public offering (DPO), companies sell shares directly to interested investors, avoiding the high costs associated with more traditional ways of raising capital.
Entrepreneurs and individuals are taking control of how money is raised and invested," says Drew Field, a San Francisco securities lawyer who has helped take small companies public for 20 years.
There were 67 DPOs totaling $97.6 million filed nationwide in the first quarter, according to Tom Stewart-Gordon, who publishes SCOR Report, a newsletter on financing alternative Last year, companies raised $454.8 million in 358 DPOs, up 40% from the previous year.
Inventor Gary Starr of Sebastopol, Calif., is one business-man who sidestepped an investment underwriter earlier this year and used a DPO to expand his fledgling electric-bike business, ZAP Power Systems. Though ZAP power packs for bicycles and scooters had been selling successfully for 2 ~ years, Starr was unable to get a bank loan. So Starr, 41, went directly to his customers to try to raise money needed to keep up with orders for the electric power packs that give a standard bicycle extra push at the flip of a switch.
The zero-air-pollution (which explains the ZAP name) Systems are popular among environmentalists and law enforcement officers, Starr says. They range from $1,499 for a scooter to $499 for a bike system (bike not included). "The main reason we did this process is it was a way of gaining capital quickly at an early stage in the business to fund the growth," Starr says. He and co-founder Jim McGreen, 43, have sold almost half of their $2.6 million DPO so far. ZAP pitched the sale of 500,000 shares at $5.25 each through the company's newsletter and over its Internet Web site (http://www.zapbikes.com).
Other entrepreneurs advertise DPOs in product packages, through bulk mailings or in their places of business. By doing it themselves, they save money in two ways: document preparation and the average 15% in fees and commission that brokers get for selling the shares.
When a broker is involved, you have three lawyers that you didn't have before, so your cost is going to go up astronomically," Stewart-Gordon says. He estimates a DPO is 10% of the cost of an initial public offering (IPO), traditional offerings done through investment banks where costs can run into the millions.
Shareholders are typically customers, employees, suppliers, distributors, and friends. They are called "affinity" groups be-cause of their tie to the company. Companies also have began to broaden their base of potential investors using the Internet. Analysts say people who buy DPOs tend to be long-term investors. That's because trading is usually arranged by the companies or made through an order-matching service rather than on an established stock exchange.
But for entrepreneurs, DPOs do not represent easy money. They still have to be filed with securities regulators, who comb through financial records and set restrictions.
Niche companies tend to make the most successful DPOs, analysts say, because investors get the chance to support some-thing they believe in.
ZAP first won the attention of environmental, who prefer the bikes over cars and other gas fueled vehicles for short commutes. The systems are being sold in the USA and abroad. ZAP will supply 5,000 systems to Shanghai Forever, a 50-year-old bicycle factory partly owned by the Chinese government.
Without the resources that were made available through the DPO, we would have had a difficult time to gear up for this magnitude of an order," Starr says.