Securities Marketing
Marketing of Stock on the Internet is the primary
function of the Internet DPO. It can be offered privately to a company's affinity group or
it can be brodcasted with banner advertising, on-line public relations, electronic press
releases, and Web site registering for Internet search engines. The Internet is also used
in conjunction with creative yet conventional marketing techniques such as "tomb
stone" offering included within product packaging to the DPO candidate's natural
affinity group. An affinity group could be customers or potential customers of a
prospective DPO Candidate.
 On-line Subscription Ordering
Prospectuses can be reviewed online and printed
from a web browser as well or by on-line requests, thus allowing an inexpensive
alternative to conventionally printed and mailed offering circulars. Properly implemented,
the potential investor/subscriber can review an electronic offering circular and then
complete an on-line subscription agreement. Currently, Directors, Officers and licensed
securities representatives can directly sell stock to the public. This means that a
prospective subscriber could be directed by phone to the DPO candidate's Web site whereby
the subscriber could then be instructed to enter purchasing information into a web form.
Secondary Market
Unlike Initial Public Offerings which are
underwritten by Investment Bankers, most Direct Public Offers lack a liquid secondary
market. This means that even though the stock is freely tradeable, there currently exists
no exchange or marketplace whereby stock can be readily traded. With NASDAQ or NYSE listed
stocks, market makers and specialists are willing to purchase and sell stock at inside Bid
and Ask prices making for a readily liquid trading environment. Typically, most Direct
Public Offerings are considered too small to be considered for an Exchange or Over The
Counter trading. CBC Communications Crop.customizes a web-based on-line stock listing
service to provide minimal after purchase market liquidity. The DPO candidate can thereby
provide minimal on-line stock listing service for buyers and sellers of the company's
stock until Internet based centralized SCOR trading systems evolve.
A Foundation
Direct Public Offerings can be the foundation for
companies seeking to be listed on OTC or on the other exchanges. Given current listing
requirements for the various exchanges, the most likely step up for a previously filed
Regulation A, SB-1 or SB-2 public offering would be to list with NASDAQ or the Pacific
Stock Exchange although a Regulation A offering could follow up with an SB-1 or SB-2
offering. Companies can begin with a Direct Public Offering then move into a underwritten
secondary offering listing with NASDAQ or the Pacific Stock Exchange. Reality is, of
course, that at this stage some companies make it and others don't. CBC can help improve
the odds by providing ongoing public relations and marketing, keeping the prospective IPO
candidate in the public eye.
DPO vs. IPO
What's the difference between a Direct Public
Offering and an Initial Public Offering? Well, usually an Initial Public Offering (better
know as an IPO) is an underwritten public offering. This means that an underwriter,
usually an Investment Banker, believes in the offering so much that it will prepay the
issuer for the stock, then go out to the public market and sell it. Usually only larger
offerings which have gained tremendous publicity in the public eye, qualify for an IPO.
Registrations such as SCORs, Reg As, SB-1, and SB-2 are normally too small to attract the
attention of national underwriters.
A Direct Public Offering is an offering conducted
without the help of an underwriter. The DPO candidate company "bootstraps"
itself by selling its stock directly to the prospective shareholder through direct mail,
to dealers on a "best efforts" basis, and now through the Internet. The DPO
combined with the Internet provides an inexpensive entree into the public offering sector
for small companies seeking capitalization.
DPO History
Until recently, Small Businesses have been
prevented from access to the strongest and most vital capital finance resource--the public
financial market. Historically, initial public offerings ("IPOs") have required extensive
and complicated federal and state registration compliance. Underwriting discounts and
commissions and other offering expenses, such as legal and accounting fees, printing
costs, transfer agent fees, stock exchange listing fees, and blue sky expenses, for an IPO
typically average between $250,000 and $500,000 for an offering of between $5 million and
$20 million. Further, upon completion of an IPO, the issuer would immediately become a
"reporting company" subject to the periodic reporting and certain other
requirements of the Securities and Exchange Commission. Compliance with these reporting
requirements result in significantly increased administrative costs to the issuer.
Following the passage by Congress of the Small
Business Investment Incentive Act of 1980, the Securities and Exchange Commission
("SEC") conferred to individual states the oversight of many securities
offerings under $1 million. State securities regulatory agencies responded with a variety
of rules and exemptions to assist small business in capital formation efforts. In
Washington State, the Securities Division of the Department of Licensing developed an
experimental program to simplify the process of public stock offerings for small
businesses. The aim of the program was to streamline the application, information
disclosure, and prospectus process into a single document which could be completed with
limited professional assistance and at a low cost. Washington State's program proved
successful, and in April of 1989, the North American Securities Administrators Association
("NASAA") adopted it as a model. Dubbed the Small Corporate Offering
Registration ("SCOR"), the program (or its variations) has been adopted in more
than 40 states. It accommodated the SCOR program by amending Rule 504(b)(1) of Regulation
D to delete restrictions on general solicitation in any 504 offering and to remove the
limitations on resale of securities sold in these offerings. Thus, by using the
offering exemptions under the SCOR program, an issuer can conduct an interstate offering
of nonrestricted securities.
Previously, Regulation A permitted exemption from registration
for public offerings up to $1.5 million. The SEC raised the exemption ceiling to $5
million, and provided for an alternative form of disclosure document similar to the SCOR
document.
The SEC developed a new integrated registration and
reporting system, known as Regulation S-B. The S-B series disclosure system includes Form
SB1, which permits registration of up to $10 million, and Form SB2, which permits
unlimited registration.
In May, 1995, the Pacific Stock Exchange received
approval from the SEC to list SCOR and Regulation A securities. This action is anticipated
to create a market for "listed" SCOR and Regulation A securities, providing
liquidity to shareholders.
Can it Fail?
Yes, here's what to keep an eye out for:
- Lack of due diligence investigation by
a third party.
- Arbitrary pricing of the security.
- Lack of substantial operating history.
- History of losses and lack of
substantial revenue.
- Poor financial condition.
- Lack of management experience or
integrity.
- No public market or liquidity for the
security purchased.
- Unrealistic business plan.
- Risky technology, products subject to
obsolescence, and unproved products and services.
- Lack of proven market for the product
or service offered by the listed company.
- Under capitalization and the need to
raise additional capital in the future.
- Robust competitors in the market
place.
- Dependence on key personnel and the
risk to the company of the key personnel were to leave the company.
- Status as a minority shareholder and
lack of any meaningful control over the business of the company, coupled with the likely
control of the company in the hands of one or a few individuals.
- Nonpayment of dividends and the lack
of any prospect of foreseeable future dividends.
- Dilution of the investment, meaning
that the amount paid for a security is much more than the book value of the security
purchased
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