San Francisco Business Times
By Jane Applegate
Making stockholders out of loyal customers
Do your customers love your products? If so, 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 them.
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. The
company let its customers know about the offering by putting a message in boxes of
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.
Schaeffer, who hired Field to help raise nearly $4 million in two DPOs, is a true believer
in the process. The 1O year-old Real Goods sells energy and conservation products through
catalogs and at a handful of retail stores. The company, which employs about 100, posted
$15A million in revenue and a net loss of $175,000 for the fiscal year ended March 31. The
loss is attributed to increased recycled paper prices.
On July 23, 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 $6.50 a
share in recent weeks.
Despite a few solid DPO successes, the market for DPOs remains small.
DPO's 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. 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
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. San Francisco attorney and direct
public offering expert Drew Field has these tips for entrepreneurs considering raising
capital from their customers.
- Is my business profitable, and would it interest prospective investors?
- Can my business be understood by people who may have no experience buying stock?
- Does my company have affinity groups (devoted customers) who would recognize our name
- Can we obtain names, addresses and phone numbers of people in our affinity groups?
- Can our management team devote time to the offering?
- Do we have audited financial reports for at least two fiscal years?
If the answer to most of these questions is yes, look further into