PUBLIC OFFERINGS CARRY BIG RISKS ALONG WITH REWARDS

By Elizabeth Brandon-Brown

In the past few years many small businesses have found a viable vehicle for raising equity in a cost-effective manner through Direct Public Offerings (“DPO”). For such offerings, most companies utilized a SCOR registration statement, accepted in 45 states, which allow them to raise up to $5,000,000 in any 12-month period.

DPOs have had their success stories, and also their failures. There are certain factors that will boost a company’s chances of success. Consistently, companies that have successfully raised equity through a DPO have an affinity group to target. This affinity group may be its customers, vendors, employees, a specialized group that follows a particular industry, professional investors or investors looking for companies on the verge of going public.

The Red Rose Collection, Inc.,a California based mail order catalogue company that markets a variety of clothing, jewelry and personal growth products mainly to women, completed the first SCOR offering in California. The president and co-founder of the company, Rinaldo S. Brutoco attributes part of the company’s achievement to an aggressive marketing campaign that targeted its customers. Each catalog included an advertisement for our stock, said Brutoco.

Brain Tainment Resources, Inc. (“Brain Tainment”) , a Newport Beach company that markets a variety of self-improvement products over the Internet has raised $250,000 in a SCOR offering by listing its securities on the Direct Stock Market, an Internet-based marketplace for public offerings and private placements. The company expects to complete its $500,000 offering by the end of July, mainly by marketing to customers and existing shareholders, states Josh Reynolds, President of Brain Tainment.

Brain Tainment is an exception to the general rule that DPOs must have a multi-marketing program directed at a target group in order to be successful. In Bran Tainment’s case its affinity groups, existing customers, already purchases the company’s products from the Internet. Even so, Reynolds states it took personal contact with investors to close most of the $250,000 in sales. “That’s why most of our investors are from California,” says Reynolds.

Reynolds’ experience coincides with the trend seen by many DPO observers -- SCOR offerings sell best in a company’s own region where investors already know about the product, the company, its management or can meet with management in order to do their own due diligence. The exception to this rule is companies like Red Rose that have product identification nationwide.

Whether a company’s affinity group is nationwide or local, most find the Internet a valuable tool to generate initial leads. The Internet, though, must be backed up with other marketing efforts. You can’t put an offering on the Internet and wait with a bucket to catch the money, states Tom Steward-Gordon, Publisher/Editor of the SCOR Report, a Dallas-based newsletter that specializes in SCOR information. In order for most DPO to be successful the president of an company conducting a DPO must take the sale of its securities as seriously as he does the sale of his products. The company must be willing to put together a marketing program, complete with presentations, direct mail, print and Internet advertising, asserts Clay Womack, president of the Direct Stock Market, Incorporated, the Santa Monica firm that owns the Direct Stock Market..

Robert Young, president of Adeptus Corporation, a Washington state company developing a chemistry system for use in collecting body fluids directly from patients, has found out the hard way that a DPO may be a costly mistake for some companies. Adeptus has spent more than $50,000 in drafting and marketing a $1,000,000 SCOR offering. Although the offering went effective in late 1996, the company has yet to sell any securities. Young admits the company did not have a marketing plan in place prior to the offering, nor the money for a multi-faceted marketing program. “We though putting it on the Internet would be all that was needed, “ says Young. After going through the experience of an unsuccessful DPO, Young recommends a company conduct in person seminars for potential investors, in additional to traditional and Internet marketing.

Although Young believes SCOR offerings are a fantastic opportunity for small businesses he believes high technology health care companies with high risk generally are not suitable candidates for a DPO. Currently Adeptus is negotiating with venture capitalists for funding.

COMMON MISTAKES MADE BY DPO COMPANIES

Before a company decides on any offering, it should have legal counsel review its capital structure, articles, by-laws and minutes. All compliance or changes to a corporation’s structure should be done prior to any public offering.

Companies should use competent advisors. The permit process can be long and costly, especially if a company tries to it without using legal counsel and accountants that have public compliance backgrounds. It is my experience, says Womack, of the Direct Stock Market, that ce companies will end spending more money if they don’t use seasoned professionals.

Companies need to have a realistic pricing structure for their offering. Majority of the SCOR stock offerings are priced between $2 per share and $5 per share. According to Womack, the average investment per Internet SCOR subscriber is $1,200. Most companies require a minimum investment of between $500 to $1,000.

Conducting a DPO requires a great deal of management’s time. If management does not have the time to commit to a sales effort, they should consider hiring a firm or outside consultant to manage the sales effort. Even though Brain Tainment is successfully raising capital through its SCOR offering, Reynolds states that if he had to do it over again he would have brokers handle the follow-up sales after the company obtained the initial leads. “Its hard to take the time to convert all the leads,” says Reynolds.

Have a marketing plan in place before starting the DPO process. As Robert Young of Adeptus found out you can’t rely on placing an offering on the Internet. Most companies that complete a successful DPO utilize a multi-faceted marketing strategy. For example, Womack of the Direct Stock Market suggest that companies use print ads to drive prospective investors to the company’s web site.

Use caution in all verbal and written statements made to the press and potential investors, especially before an offering becomes effective. A news story may delay the effective date of a company’s offering.

The trend for DPOs is expected to continue upward as more small businesses realize this is a viable way to raise capital. Many SCOR watchers predict this year is will to be strong for DPO offerings, no matter want happens to the traditional stock markets. Womack partially bases this prediction on his own observation that many investors that are using DPOs as an effective means of building their own mini-venture capital fund.

Elizabeth Brandon-Brown is a securities and corporate attorney and can be contacted at (561) 289-3815 or by e-mail at elizabeth@brandonbrownlaw.com.

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