Andy Klein on DPOs or do-it-yourseslf IPOs

The pioneer of the most celebrated IPO says it's tough to take companies public on the Net

About 15 years ago, Andy Klein - then a securities attorney - wanted to raise funds for his tiny Manhattan brewing company, Sping Street Brewing. Andy, who currently is CEO of his new company, Spotzer, decided to use a little-known vehicle called Regulation A, which allows companies to raise up to $5 million by soliciting directly to the public. 

Back then, the Internet was hardly commercialized. Yahoo, Amazon and eBay were yet to be public and Facebook founder Mark Zuckerberg was about 10 years old. But the Web was enough of a distribution and marketing platform for Andy to quickly raise awareness for his beer company beyond the streets of New York City. He decided to do a direct offering to the public, much like Ben & Jerry's (now a division of Unilever), did through advertisements on its packaging. The Ben & Jerry's offering was made only to residents in Vermont, through an uncommon law governed by that state.

Andy's offering would have a far wider reach. Eventually, Andy raised around $1.6 million from around 3500 people, or 1% who viewed the prospectus from the Web site. 

Now that the Internet is far more ubiquitous, there are more startups emerging, cheap technology is readily available, and many startups have significant fans who might not mind putting in a few bucks to support a favored service or product, why haven't we seen more use of Regulation A? 

It's still challenging, said Andy. The legal and marketing costs outweigh any potential upside, said Andy. Watch my interview with Andy was we explains the challenges back then and now. 

BF: In 1995, you brought Spring Street Brewery public on the Internet. Despite the fact that the Internet is very mainstream, why haven't we seen that many Internet offerings? 

AK: I think we've seen the Internet become like a telephone, just the fact of life. So, big investment banks have complete adoption of the Internet to market securities. At the public market offering, the Internet is quite often used by banks to distribute notices so it is part of the capital raising process. I don't think we've seen a lot of the more early stage efforts to get small companies married to shareholders largely through the Internet. I think there are  some overlooked opportunities there.  

BF: You used something that not many people know which is called Regulation A and this allows companies to raise up to five million dollars. This is really in the space where many companies raise venture capital. That's what you're talking about. Why don't we see many people using this?  

AK: In 1995 not many securities lawyers and companies were aware of Regulation A and it has not changed much today.  

BF: What was the biggest challenge back then in taking a company public on the Internet and trying to raise funds from all of these individual investors?  

AK: Back in 1995, it was getting people to know about the offering. In my beer company, we put out press releases and we had opened the first public stock offering on the Internet. About six hundred newspaper stories later, we had three thousand investors buying from our website. What we did at Wit Capital in the next five or six year was that we built a platform which other companies did not have that benefit of getting famous from the newspaper pages to have a way to reach small investors. This worked to a large extent. But what happened in the late 1990s with the insane period of public stock offerings is that all of the investors were clammering for shares in the hottest IPOs which were going 200% up in the first days. That became what Internet offerings were all about in the boom years.Then the world fell apart and the Internt bubble popped and it really hasn't gone back to a day where small investors were out there lookign for venture stage investments which was what Springstream was really all about and what we started to do at WIT Capital. The question is have we been brought back to the point where public equity markets are not so interesting or not exploding week by week? It would be good for entrepreneurs and investors if there were ways today using the technology to meet eachother. Nobody has really put that to test so in the next five years it could be interesting.  

BF: But you have to use this vehicle called Reg A?  

AK: Well Reg A is one of the many ways companies can get in a position legally to go public. It happens to be designed for small companies without big budgets for lawyers or expensive advisors in essentially to do it themselves. In a sense Reg A is designed to be understandable, to be relatively efficient, and it woudl allow companies to go through a certain amount of  preparation to make offerings to the public. But even full blown public offerings which require more investment up front, are also accessibl by smaller companies if they have the time and the resources.

BF: If someone wanted to do a Reg A offering with you today, what would be the challenges? How would you advise them?  

AK: I would ask them to think long and hard about who the investor is that they're trying to reach. Companies that have built in a following are great canidates. That's what started me down the path. I had beer enthusiasts that liked my beer and we thought they could become investors. In fact a big part in what Wit Capital did in the context of the public offering is try to connect companies with their own customers and users. If you have an audience, you have an interesting investment proposition, the Internet can be a simple way to put those together. If you don't have that, you have a few big customers, you better have a good idea on how to get the word out. It's hard because marketing is a huge part of that and unless you get an audience, you won't get investors.   

 BF: You still need to have a selling mechanism; people closing the deal.  

AK: The other thing is that over the years, it has been over-estimated where people thought about doing public offerings is the closing process where you can use the Internet and the press to generate leads. Securities are sold and not bought and so getting on the phone or exchanging a potenital email with someone is probably a necessary piece of it. If you don't plan for it, you can probably put a lot of work up front and see the offering but not have success. Sellign money and raising stock is always a but if hard work in sales and the Internet doesn't make that go away.     

BF: What are the differences between 1995 and 2009 that makes this type of offering a viable option for companies?  

AK: There are positives and some unknowns because the degree to which the Internet has become ubiqitous, the number of people that can participate has gone to a hundred percent. Back in 1995, when you had a very small pioneer group of people looking at content on the Web...teh appetitite of investors is a real unknown. Back in 1995 before the techboom, it was very early adapters that were looking to do venture-like investing. Now you see two market bubbles and investors beat up badly and have been for a long time. I don't really know where the head of most investors is today. It would be interesting to find out.   

 BF: There are a lot of companies now that can be sustainable businesses that are making a couple of million dollars or so that have affinity with users. So with Wit Capital, it moved off of taking care of these venture style companies and moved onto the big stage companies because there were not enough small companies and there was not a business there. Is there a business today for investment banks that might want to  pump out these Reg A offerings?   

AK: It has fundamentally changed the nature of what it takes to be successful in a business. Less capital, more technology readily available, and smart people who have been through startups before. There are companies who have a chance to making it fairly big with a limited amount of capital. But can you build a business as an investment bank doing that? I am not sure. The classic challenge for the investment banking community has been that the sliver of companies that has been pretty slim when you look at the top of the seeking companies that have picked off by the venture firms. I don't know how big that sector is but we are going to have less venture firms than we have had in the past and we're going to have several companies start with less money. I would like to hope that this going to become a bigger opportunity than it was before.      

BF: Well Andy, back in 1995 you didn't know that fifteen years later, people would be looking to you for advice and wisdom.