Web Links Owners for Direct Public Offering
The Internet offers a wealth of options for the business owner seeking outside capital, including new ways to sell your stock to the public--in effect to do your own mini-IPO.
As outlined in this space in recent weeks, you can already use the Web to:
* Do your business banking.
* Get a modest business loan.
* Make a connection with a private equity group or venture capitalist.
* And even get your business plan in front of an angel.
In short, the Web, endowed with an astonishing ability to connect huge numbers of people, is fast becoming an important tool in managing the finances of any growing company. Even though it remains a big and sometimes hazardous undertaking to sell the stock of a small or mid-size enterprise on the Web, it can be done. And as time passes, it should get easier.
What is a direct public offering?
Most commonly the phrase refers to a sale of stock taking place under a specific U.S. Securities and Exchange Commission regulation called SCOR--for Small Company Offering Registration. In common usage, the phrase applies to any private-placement or public stock offering taking place under several different SEC regulations, and a direct public offering differs from an ordinary public stock offering in that:
* It’s simpler.
* It allows you to raise as much as $5 million without going through an underwriter.
* It bypasses some, but not all, of the complications and expenses associated with an ordinary public stock offering.
Two general Web sites (https://www.investorlinks.com/stocks-dpo.html and https://www.allstocks.com/links/html/ipo___dpo_links.html) list a number of Web sites seeking to help the business owner in putting together a direct public offering, among them two of particular interest:
* Direct Stock Market (https://www.dsm.com), headquartered in Santa Monica.
* The Niphix Trading System (https://www.niphix.com), headquartered in Peoria, Ill.
The first of these, Dsm.com, is the brainchild of Clay Womack, a widely known expert in business finance who serves as president of the California Capital Access Forum Inc., a nonprofit group seeking securities law reform in California.
“Our Web site provides a means of distributing a company’s prospectus electronically,” Womack says. “We’ve posted about 120 deals with an aggregate capital exceeding $430 million, of which about 50 raised between $75 million and $100 million.”
Essentially a marketing device for businesses seeking to put together private-placement or direct public offerings, Dsm.com--like some other Web sites described in this space in recent weeks--allows you to post a prospectus describing your stock issue.
Also like other Web sites, Dsm.com makes your deal accessible to a database of 2,000 investors, and it has in the works a matchmaking system allowing you to aim your deal at investors with specific wants and needs.
Unlike other Web sites, however, Dsm.com also allows you to videotape what Womack calls a “virtual roadshow”--that is, a presentation detailing your business prospects accessible electronically to investors in Dsm.com’s database.
The unique aspect of the Niphix system, founded a year ago, is that it offers investors a secondary market for the stock they get in exchange for their capital--a crucial benefit to investors and, if it comes into wide use, an important development in the capital marketplace for small and mid-size businesses as a whole.
In plain English, this means Niphix gives your investor an exit strategy, allowing him or her to sell stock in your company to other investors down the road, and it’s important because the illiquidity of such stock is one reason investors hesitate to back small and mid-size companies in the first place.
“Niphix can allow the small or mid-sized business to conduct an offering to raise capital,” says Nimish Gandhi, Niphix’s founder, “and give investors a secondary trading place for their securities. That’s important for the company seeking to raise capital--because it provides liquidity for the investor who wants to cash out.”
Like Dsm.com and most similar sites on the Web, Niphix does not offer due diligence services, so both seller and buyer in any deal proceed at their own risk--which brings up two important cautions for anybody who wants to use the resources of the Electronic Age to raise outside capital:
* Give serious thought to “fingerprinting” your business plan and/or your prospectus with an online registry such as Firstuse.com (https://www.firstuse.com), a kind of digital notary that allows you to time-stamp the creation of your documents and intellectual property.
* Don’t even think about flying solo in raising capital on the Internet. If you want to make the most of the wealth of resources it makes available to you, you need expert advice from an attorney, an accountant and maybe even an investment banker.
Indeed, any private-placement or public stock offering must comply with complex federal and state securities laws, according to Mark Hiraide, a partner in the Torrance law firm Petillon and Hansen, and there are more punctilios to observe in even the simplest offering than there are books in the Library of Congress.
“The advent of the Web provides a cost-effective way to make a general solicitation for a company’s stock, but there’s no way to get around the hurdles involved in complying with federal and state securities law,” says Hiraide, a former attorney with the U.S. Securities and Exchange Commission.
Next week: How a Southern California business owner used the Web to raise millions of dollars in outside capital.
Juan Hovey can be reached at
(805) 492-7909 or at jhovey@gte.net.
