Drew Field
Direct Public Offerings

Case Studies

New Mexico Financial Corporation

When Thomas Edison was asked how he had "discovered" the right material for his light bulb filament, he answered that he knew it was the one, because he had first tried everything else.
That's how New Mexico Financial came to try a Direct Public Offering.

In early 1973, we began the legal work necessary to help what was then "Sandia Financial Corporation" prepare for an underwritten initial public offering. A letter of intent had been signed with the proposed managing underwriter, G.H. Walker & Co., which was one of those smaller but national underwriters which had done several public offerings in the 1950s and 1960s.

Sandia Financial Corporation was a holding company for four separate savings banks, all named "Sandia Savings." By adding "North," "South" and "West" to three of the banks' names, the company had been able to have the only state-wide banking system in New Mexico, despite a law limiting branches to within 100 miles of a bank's headquarters. If you have ever been to New Mexico, you will probably recognize "Sandia" as the mountains which dominate the horizon in the central state. At one of the early "all hands" meetings, the underwriters said the company name would have to be changed, because no one in New York would have ever heard of "Sandia." Changing the corporation's name to "New Mexico Financial" later became the major marketing hurdle when its shares were offered directly to customers of the Sandia Savings offices.

Near the end of 1973, all of the work had been done (and the company had paid $144,452 in offering costs) to be ready for the underwriting. A few days before it was all to have been completed, the underwriter postponed the offering. The "continuing uncertainty of the stock market" was cited as the cause for delay. As weeks turned into months, the underwriter merged into another firm to be G.H. Walker, Laird & Co. Another few months and that firm was acquired by White, Weld & Co., a much larger brokerage firm. Not much later, White, Weld was absorbed into Merrill Lynch, the largest securities broker-dealer in the country. The company and its capital needs were far below the Merrill Lynch interest level.

Business for the company, meanwhile, was very profitable and growing rapidly. The ability to grow, however, was being limited by the need for more equity capital. We began meeting with other underwriting firms, primarily those in the Southwest with some experience in IPOs. After furnishing reams of data and conducting several meetings and tours, the time never seemed to be right.

Finally, in May 1976, management decided to try marketing its shares directly to its depositors, borrowers and others in New Mexico and West Texas. In what was to become an early "Screen Test for a Direct Public Offering," as described in Chapter 5, management saw that it had (1) exciting prospects for sharing in the Southwest's rapid growth, (2) several years of profitable operations under present management, (3) honest, socially responsible and competent management, (4) an easily understood business of accepting deposits and making loans, (5) customers who had already trusted it with their money, (6) customers who would certainly recognize and pay attention to its communications (once we dealt with the underwriter-induced name change problem), (7) those customers' names, addresses, telephone numbers and account information were all in the company's database, (8) the president's assistant could be available to be the project manager and (9) audited financial statements had been required forever by banking regulators.

A full registration on Form S-1 was required with the Securities and Exchange Commission, although the offering was only for $1.5 million, since this was long before the SEC's Small Business Initiatives brought simpler forms. There were many issues raised by the SEC staff about why the company was using direct marketing and whether it had to be a broker-dealer (which, as a bank holding company, it could not have legally become.) Similar questions came from the banking regulators who reviewed the proposed offering.

We filed with state securities regulators in New Mexico, Texas, Colorado, Arizona and California. They each had questions, about how we had arrived at the offering price and how we were going to sell without using brokers. The offering cleared in each of those states except Arizona, where the Director of Securities himself (long since gone) telephoned personally to say that he did not want "a single piece of paper" relating to the offering "crossing into my state." He did not believe hat securities should be sold by anyone except a registered broker-dealer.Clearing a regulatory path was one major victory, but now we had to market the shares, without breaking any of the rules we had just helped to write. In our search for someone with experience in the direct marketing of something like corporate shares, we were led to a direct marketing consultant, Joseph Kreuger, who had helped American Express in the direct marketing of insurance products and Wells Fargo Bank with the direct marketing of credit cards. A series of three letters was created (to transfer the relationships with "Sandia Savings" onto the parent "New Mexico Financial") and we trained everyone from the tellers to the board members in how to talk with prospective investors and stay within the rules.

All 150,000 shares offered were sold, at $10 per share, by April 1977. In 1978, a second DPO was registered and completed, for 160,000 shares at $11 per share. The company was acquired in 1982, at a substantial gain to the shareowners.