Drew Field
Direct Public Offerings

U.S. News & World Report
June 1996

Going public to the public
Small businesses can bypass underwriters and save big money

Spring Street Brewing faced the classic crunch of a fast-growing small business: It needed funds to expand, and getting them would be tough. The three-year-old New York microbrewery was too tiny to interest Wall Street underwriters, but the owners didn't want to sell out to venture capitalists. So last year Spring Street launched an initial public offering- all by itself. The company put up a home page on the Internet's World Wide Web to alert the public to the impending sale and printed notices on six-packs of its Wit ale. The announcements urged customers to call or write for a prospectus and stock order form.
Spring Street billed it, and they came. The offering, which closed in February, drew 3,500 investors, mostly beer connoisseurs. Some 900,000 shares were sold for $1.85 each, raising $1.6 million, without a cent paid in fees to underwriters or brokers. Then in March, the Securities and Exchange Commission gave the brewer the go-ahead to operate a permanent trading site for its stock on its Web page (http://www. witbeer. corn). Buyers and sellers will negotiate via private E-mail without going through a broker. The site should be up within weeks.
Fifty questions. Direct public offerings, as these do-it-yourself efforts are called, are rapidly gaining popularity with small businesses itching for a cash infusion. Last year, about 40 companies completed direct public offerings, up from an estimated 28 the year before. Small businesses with revenues under $25 million can set up a DPO most easily through a small corporate offering registration (SCOR), a simple process approved by the North American Securities Administrators Association in 1989 and legal in 45 states (Alabama, Delaware, the District of Columbia, Florida, Hawaii and Nebraska may eventually sign on). The business must answer 50 questions about the company and its financial history and list principal risks to investors. In many states, the minimum and maximum amount of money desired is also required, as are details about how it will be spent. The filing usually is made to the banking and finance department or to the secretary of state in each state where the company wants to sell shares. The typical fee is $500.
After regulators approve the SCOR, the company has 12 months to raise the money. Following a successful offering, a company can set up an order-matching service with a local brokerage that will act as a stock exchange or keep a list in house to match buyers and sellers. If a firm does not raise the minimum it has set within the offering period, investors must get their money back, with interest.
By handling all the paperwork, marketing the shares and cutting out most registration, brokerage and legal fees a DPO can be done at a cost of about 6 percent of the funds raised, against 13 percent for a traditional underwriting. Moreover, DPO investors tend to be loyal, say experts, and do not demand immediate profits. "For shareholders, it's more like buying into a business than buying a stock," says Drew Field, a San Francisco lawyer and DPO specialist.
Companies hawk shares at the grass roots - and in the aisles. The pasta mavens at Annie's Homegrown, a Chelsea, Mass.-based maker of macaroni and cheese that hopes to sell 600,000 $6 shares, launched its offering last August by slipping its pitch into a million boxes of tiny shells. Shareholders in Blue Fish Clothing learned about the offering from sales tags hanging from its apparel in boutiques at Neiman Marcus and other tony retail outlets. The $10 million-a-year Frenchtown, N.J.-based maker of hand-dyed garments raised $3.9 million from mid-November to mid-May, by selling $5 shares in minimums of 100 shares. We were hungry for cash," says Jennifer Barclay, 29, who founded the company II years ago in her father's garage. But we only wanted to offer shares to people who understood what our company is all about.
Good bets. Annie's Homegrown and Blue Fish typify good DPO candidates, says Field, with annual sales between $3 million and $25 million and a loyal consumer base. Moreover, a one-product company, such as a brewer, is easier to market to investors than a multiline business might be. Financial statements can be uncluttered, and the business plan can be communicated in a few short sentences.
While launching a DPO is relatively simple, success is more elusive. Last year, only 30 percent of the firms that filed offerings met their minimum goal for raising funds, according to Tom Stewart-Gordon, publisher of the newsletter SCOR Report (P0 Box 781992, Dallas, TX 75378; $280; 14 issues a year). That's because management often doesn't have the tune to sell shares and run the company at the same time, says Stewart-Gordon.
Potential shareholders need a sense of commitment, too. The small number of shares makes trading difficult, and share prices can take years to rise, if at all. And under SCOR rules, a small business doesn't have to comply with the disclosure requirements of publicly traded stock exchanges. That means it might not provide any audited annual or quarterly financial reports to shareholders. (Many do voluntarily, though.)
On the other hand, owning a little piece of a microbrewery or a funky clothing company is a peculiarly American thrill - and, in time, shares may appreciate, and may even be listed on a regional exchange. Last week, Blue Fish shares traded on the Chicago Stock Exchange at $9. Spring Street's shares last traded at a price of $2, up from the initial $1.85- a modest gain, but worth toasting.