High-Risk-Patient Equity Capital for Small Business

After viewing a CBS 60 Minutes II segment titled: "Wall Street Prophets" it appears that that there is grave concern in the retail investing communities. The public is starting to believe that Wall Street and other professional financiers are not doing such a great job meeting their clients’ needs when it comes to their investment spending goals. NASDAQ as one time lost over 50% of its value since the glory years of the late 1990s. In all, about $1.5 trillion in investments have been simply wiped out. A lot of this money was lost following the advice of stock analysts, these experts usually work for big brokerage houses. Most view them as the prophets of Wall Street. They analyze a company, look into the future, and recommend whether to buy the stock. The CBS 60 Minutes II segment pointed out that in fact that there maybe a built in conflict of interest between them and the investing public at large. There is an old adage that says "He who has the gold makes the rule". The stubborn fact remains, Wall Street still makes money whether investors win, loose, or draw.

Adages like these don’t have to be true when it comes to corporate finance for small business. Now there is a way for small businesses and the investing public at large to repossess the process of capital formation, similar to what happened in early colonial American under the button wood tree. This began the early form of the Wall Street Exchange, providing a direct connection between investor and entrepreneur.

With a 1984 revision to the Securities Act of 1933, knowledgeable business owners can sell their companies' stock through a Direct Public Offering (DPO), without filing a SEC full registration. This process, which is effective for any type of business from high-tech companies to service firms, uses a simplified registration process and provides long-term equity financing that is critical for small and emerging businesses. In exchange for sharing ownership of the business with investors, a business owner can access capital without incurring interest or principal payments.

There are several advantages to launching a DPO as a means of raising capital. Unlike the more complicated and costly IPO, a DPO is less expensive and only requires registration with the securities commission of the state in which the business operates. The benefits of selling stock in the company are two fold - it raises the capital necessary for growth (proceeds from the sale of stock are maintained by the company), and it markets the company and its products or services. A small company selling it's own stock promotes locally-based financing and community development, since 90 percent of principal investors are typically from within a 50-mile radius of the company and are familiar with the company and its products. Additionally, as a consideration for future funding, a company may attract the attention of investment bankers.

For these reasons, initiating a DPO is becoming an increasingly popular way to raise capital. Currently, 42 plus states permit the use of Small Corporate Offering Registrations (SCOR), a type of DPO, and, as reported in December 1996 by the American Banker, 132 companies have fully funded their businesses through SCORs.

FACT: Over the last 15 years, Fortune 500 companies (companies most likely financed by Wall Street) have reduced their workforce from 16 million to five million. Over the same time period, small business has added 20 million new jobs. They have done that with less than 1% of publicly traded equity capital; it is obvious that if this creative force had the capital, they could propel the economy forward in spectacular fashion. The SEC has developed a hands-off approach for much of small business stock offerings, preferring that regulatory responsibility he principally with the states. As more people learn about and successfully use a DPO, this type of financing could become a favorite for emerging, high-growth American businesses in the future.

With sound programs like this, we can see learn our lessons from this "Casino economy" and shift investment capital from investment in speculative "paper assets" to productive investment in a real job creating economy.