Drew Field
Direct Public Offerings
Case StudiesZap Power Systems

Zap Power Systems

Two major challenges in the development of DPOs were presented by Zap Power Systems:

  • How to finance the business until we could do the direct public offering, and
  • How to market shares when there were only 2,000 customers as an affinity group.

Zap was started in late 1994, to manufacture and sell a battery power kit for bicycles. It was founded by a group who had many years of experience in electric vehicles, but the company was only a year old when the project began. Its first patent was granted in February 1996 and it was ready for rapid expansion of production and marketing.

To solve the need for very near-term capital, we did a "direct limited offering." This involved the same process as a direct public offering, with two major differences. One was that the regulatory requirements were primarily met by using the various exemptions for "limited offerings" at the federal and state levels. Some filings were required, but the time and expense could be reduced.

The other major difference between the "limited" and a "public" offering was that each new shareowner needed to commit a much larger minimum amount than in a typical DPO. They also had to meet other standards, from their relationship to the company or its founders, from their business experience or from managing investments.

A limited share offering memorandum was prepared, using the public offering prospectus format. Company founders prepared a list of prospective investors, who were told that an offering was taking place. If they were interested, they got an offering memorandum and share purchase agreement. This was different from the usual "private placement," in that there were no negotiations about price or terms. Like a DPO, the investors either purchased what was offered or they did not. Every investor got the same treatment.

Success of the direct limited offering helped Zap to meet its immediate growth objectives and to prepare for its initial DPO. A registration on Form SB-2 became effective with the SEC in October 1996.

Zap had some major marketing limitations for the DPO. Since its products sold for several hundred dollars each, there were very few individuals on its customer database certainly not enough to buy more than a minor amount of the offering. This meant going beyond the affinity group marketing that had been the basis of all our DPOs for 20 years.

Some of the success came from getting the word out in the local community, the town of Sebastopol and Sonoma County, California. Local news coverage was helpful and Zap held several open houses at its plant, offering free rides on its electric bikes. Other investors learned about Zap because of its leadership in "Zero Air Pollution" transportation. Publications and organizations directed toward alternatives to air polluting vehicles would hear about Zap and request a prospectus.