Film Company Taking Direct Route to Raise Money

With all the action in venture capital and initial public offerings these days, why would a tiny private company try to raise money on the Internet through a direct public offering of stock?

Fledgling Amazon Films, a Marina del Rey partnership formed last year by two women who dream of producing films, is trying to raise $1 million by selling shares at $1 apiece, with a $10,000 purchase minimum.

Brendan Shepherd and Sarah Reid are selling the DPO through Ace-Net (https://www.ace-net.org), “the Angel Capital Electronic Network,” an Internet listing of various small-company securities offerings that is sponsored by the U.S. Small Business Administration. Amazon’s highly speculative deal is offered only to accredited investors with at least $1 million in assets.

Amazon has been marketing the DPO on its Web site (https://www.amazonfilmsla.com) since early March, but so far only one backer has committed--a deep-sea diver who heard about it from a friend and plans to buy a $20,000 stake.

DPOs give entrepreneurs the ability to raise up to $5 million without the expense and effort of an initial public offering--but for investors, they offer none of the protections of an IPO.

The Securities and Exchange Commission exempts several categories of small-stock offerings from normal registration requirements such as financial statements. Exempted categories include the small corporate offering registration, or SCOR, a sort of mini-DPO wherein a company can raise up to $1 million. DPOs have been around since the early 1990s, but small companies have gotten wildly mixed results using them.

Although entertainment companies sometimes raise money on the Internet for a single film, it’s rare for a production company to use Amazon’s strategy, said Geoffrey Gilmore, co-director of Sundance Films, which runs one of the nation’s leading independent film festivals.

Gilmore said he’s never heard of Amazon and pointed out that few independent movies ever make a dime.

“I can’t imagine anyone in their right mind investing in something like this,” he said. “You have a better chance of winning the lottery. These people don’t even have a track record.”

Indeed, these small-scale financings, while helpful to growing companies, are obscure and generally much riskier than traditional IPOs because they have no backing from major Wall Street firms to support the stock after it is publicly traded, and no high-profile analysts following the company to update investors. There’s also no guarantee of a liquid trading market after the DPO.

There are registration requirements, but they are far less complex than with a typical IPO. DPOs are marketed in various ways, including directly to a company’s customers, through a company Web site or through a clearinghouse such as Direct Stock Market in Santa Monica.

If the stocks aren’t traded over the counter, the companies also aren’t required to report earnings and other data on a regular basis to the SEC or to the state. However, if there are more than 100 shareholders, the company must report audited financings directly to investors.

“Some of these very small direct offerings haven’t fulfilled their promise,” said Lee Petillon, a Torrance attorney at Petillon & Hansen who helped write the SCOR statute for California, which took effect in 1993.

“Entrepreneurs don’t know how to go out and get investors. They aren’t very successful at it, because they are out there running their companies,” Petillon said.

Shepherd, 41, and Reid, 39, formed Amazon Films after they met in 1992 on a forgettable film called “Road Killer” that was shot in Las Vegas. Reid, a native Texan who isn’t afraid to use her Western drawl, was a production manager, and Shepherd was a production coordinator.

“When you work on something like that, you really bond with people,” said Shepherd, a West Virginia native who had worked on TV and feature film projects for Miramax, HBO and Showtime. “We decided we wanted to do what we wanted to do--films that interested us.”

In 1999 the two women formed Amazon and set up shop with about $50,000 of their savings. Part of that was used to buy an ad in the Hollywood Reporter inviting people to send them scripts and short or feature films.

The screenplays and movies poured in. But Amazon has yet to produce a film, although the partners say they have several projects in the works. Reid and Shepherd say the most promising one is “Welcome to Da Nada,” a romantic comedy tentatively set to star Yasmine Bleeth.

In some ways, Amazon’s deal resembles a Hollywood fantasy camp more than an investment.

“If they are qualified, like a cameraman, then they can be considered for a [job],” Reid said. “If someone’s daughter is an actress, then she’s going to get a shot at getting a part. Or investors could be interns on the set.”

But investors won’t get to see the dailies or a detailed budget for each film, as they would if they were backing a specific movie.

Along with the Bleeth project, the women hope to produce the first feature film made for the Internet.

Though DPOs are low-profile, they can succeed.

Two of the best-received deals on Direct Stock Market came from ZapWorld.com, which sells electric bikes, scooters and motorcycles. The company, based in Sebastopol, Calif., raised about $4 million from the offerings in 1996 and 1997, and the stock (ticker symbol: ZAPP) now trades over the counter at $8.75 a share. Its first offering was for $5 a share, the second for $6.

“It was an interesting way of attracting capital, but it’s not for everyone,” said Gary Starr, chief executive with ZapWorld. “You have to have an affinity group of customers, and for us, we have people who really want electric vehicles and feel passionate about it.”

Direct Stock Market charges companies $5,000 to $10,000 to post an offering statement on its Web site, which makes a deal accessible to its database of 22,000 registered investors, about 2,500 of whom are accredited millionaires. Many of the deals are restricted to accredited investors.

Founded by Clay Womack, the company also allows entrepreneurs to tape a “virtual roadshow” that can be shown to potential investors via streaming video.

“We kind of created the space on the Internet for direct offerings,” he said.

Since its founding in 1996, the company has posted more than 140 deals, about 40% of which have successfully raised capital, $130 million total. The other 60% failed to lure enough investors to be completed.

Womack, whose firm is not taking part in the Amazon deal, said it could be a tough sell because the company has no finished films and, in all likelihood, not a large “affinity group.”

But Amazon’s Shepherd expressed hope.

“We’re very proactive in marketing our company,” she said.

Remember that public offerings are speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.