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.