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Small Business
The direct public offering
June 10, 2000: 7:00 a.m. ET

More small companies are raising cash by selling stock to their loyal customers
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NEW YORK (CNNfn) - Do your customers love your products?  Then maybe they love your company enough to invest in it.

Small companies with loyal customers and growing potential are likely candidates for an alternative form of financing called the direct public offering, or DPO.

"Ninety-five percent of the people who invest in a DPO don't have a broker and have never bought shares directly in a company," says Drew Field, a San Francisco securities lawyer and certified public accountant who has helped clients raise more than $100 million since 1976. Through the years, he's worked with a variety of companies from banks to a clothing manufacturer, pasta maker, and a homeopathic pharmacy.

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Field, who charges a fee for his services rather than taking a piece of the deal, cautions that DPOs are not for start-ups; they work best for successful companies with devoted customers or "affinity groups," as he calls them.

Successful DPOs take about a year to complete and require an investment of time and money. Company owners and managers usually offer shares directly to customers, generally via direct mail.

The down-home approach


Many successful DPOs are launched by companies involved in selling alternative products, such as natural foods and energy conservation products.

For example, a DPO launched by Annie's Homegrown, a natural pasta maker based in Chelsea, Massachusetts, raised more than $1 million in 1996. The average stock purchase was about $580, said Field, who helped manage the deal. The company let its customers know about the stock offering by putting a coupon in the macaroni box.

This down-home approach works very well for companies with a strong commitment to customer service.

"You can't have a better customer than someone who owns the company," says John Schaeffer, president and chief executive officer of Real Goods Trading Corp.

Schaeffer, who hired Field to help raise nearly $4 million via two DPOs in the 1990s, is a true believer in the process. The 12-year-old Ukiah, California-based company sells energy and conservation products through catalogs and at a handful of retail stores. In 1996 the company, which employs about 100 people, opened a 12-acre Solar Living Center in Hopland, California, to demonstrate its products in action. The center has since become a major tourist attraction.

In July 1996, Real Goods began selling its shares on the NASDAQ Small-Cap Market -- good news for investors seeking more liquidity for the stock.

DPOs haven't reached critical mass


Despite a few solid DPO successes, like Annie's Homegrown and Real Goods, the market for DPOs remains limited.

"DPOs haven't reached critical mass yet, because not enough people know about them to make a market," said Tom Stewart-Gordon, publisher of the SCOR Report, a Dallas-based newsletter that tracks small corporate offerings.

Still, he said, in 1995, 40 companies raised the funds they set out to raise, compared with 28 in 1994.

Figuring out exactly how much money is raised through these small offerings is tough, he said, because although companies file a form with the Securities and Exchange Commission, there is no agency or person tracking completed DPOs.

In 1996, Stewart-Gordon expects 300 companies to launch small stock offerings.

One of the smallest DPOs in history raised $470,000 for Hahnemann Laboratories Inc., a homeopathic pharmacy in Albany, California.

Founder and president Michael Quinn said he turned to his customers for help because he didn't have the money needed to build an FDA-licensed laboratory. The company produces natural homeopathic remedies, which are considered an alternative to synthetic prescription drugs.

Quinn, a former hospital pharmacist, sent 30,000 letters to people on his mailing list. He followed up with a prospectus to 2,100 people who asked for more information. A total of 242 investors ended up investing just under $2,000 each.

The company, which has 14 employees, reported revenues of $673,000 for the year ending in June 1996, compared with $580,000 in 1995.

The new lab in San Rafael cost about $250,000-money raised by the DPO. Quinn said legal, accounting, printing, and postage costs for the offering were about $103,000, but said it was money well spent.

"It's worth the time and money it takes if you are totally committed to the work you're doing," said Quinn.

(Excerpted from 201 Great Ideas for Your Small Business, Copyright 1998 by Jane Applegate. Published by arrangement with Bloomberg Press. Excerpts appear on Saturdays on CNNfn.com.Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.