The Internet is working its magic on how we buy everything from books to plane tickets to cars. Why shouldn't buying a newly issued stock directly from a company going public -- a so-called direct public offering (DPO) -- be any different?
At first glance, Internet DPOs seem a splendid idea. Documents posted on the Web avoid costly printing bills. And DPOs save the cost of hiring an investment bank to sell stocks, which can run a couple of hundred thousand dollars -- typically 6 percent of the capital raised.Best of all, small investors who generally don't get a share of juicy initial public offerings can have a shot at newly minted stocks, which often see immediate run-ups in price.
For some small companies, DPOs are a dream come true. Internet Ventures, a Los Angeles company that sells high-speed Internet service, used the Internet to help raise $2 million in private financing before completing a $5 million DPO last summer. Raising money via the Internet "worked very well for us," says president Donald Janke.
But happy endings for sellers tend to be the exception, not the rule. The main problem is that DPOs are being done almost exclusively by small companies raising less than $5 million.
Bigger companies can afford to pay an investment bank to sell the stock for them. In any case, small companies often mean weak companies. And for investors, such a limited market means that too many small offerings are outright frauds.
While admitting that the system has flaws, Clay Womack, Direct Stock Market's chief, says that once he has a "critical mass" of 50,000 to 60,000 investors looking at Internet DPOs, more and better deals will start to flow online.