Public offerings: pro and con

Succeeding in small business

July 13, 1992|By Jane Applegate | Jane Applegate,Los Angeles Times Syndicate

After raising nearly $400,000 from friends and relatives to finance his agricultural information company over the past eight years, David Katz decided his customers and the public might want to invest in his Davis, Calif.-based agAccess Corp.

Mr. Katz, an organic-arming expert, studied financing options before filing a federal Regulation A offering to raise $1.1 million by selling 300,000 shares of preferred stock at $3.75 per share.

"Reg A's" as they are called, are designed to help smaller businesses raise as much as $1.5 million a year and are exempt from Securities and Exchange Commission registration. Still, companies are required by the SEC to file an extensive disclosure document and an offering statement. In most cases, the stock offering also is subject to the approval of state securities regulators.

"The whole process takes more time and energy than you'd ever imagine," Mr. Katz said. "We've had a real cash crunch because we've had to finance both the company and the Reg A filing."

He estimates he'll spend $44,000 in legal and brokerage fees for the offering, which has brought in about $270,000. The company has annual revenues of about $500,000 and is approaching the break-even point, Mr. Katz said. It has a month or so to raise $300,000, the minimum required before agAccess can spend any of the money it has raised.

At first, Mr. Katz planned to handle the offering himself. Realizing it was nearly a full-time job, he retained an attorney and hired Progressive Asset Management, an Oakland, Calif., investment firm specializing in socially responsible investing. For a 10 percent commission, Progressive is marketing the offer to qualified investors and working with other brokers to get the word out.

Although the SEC bills the Reg A as a streamlined, efficient way for small-business owners to raise money, the agency's Los Angeles branch required Mr. Katz to respond to 75 comments and questions before approving his plan in early February.

In fact, Reg A's are not popular because they require so much paperwork to raise so little money. In 1991, only 44 Reg A's were filed nationwide, down from 439 in 1981, according to the SEC.

But if SEC Chairman Richard C. Breeden has his way, Reg A's will be a lot more attractive soon. This year, Mr. Breeden and his staff asked Congress to make some substantive changes in the law to broaden the appeal of the public offerings available to entrepreneurs.

"We've proposed to raise the Reg A limit from $1.5 million to $5 million," he said. He also wants small companies to be allowed to circulate information about their companies to "test the waters" before spending to file the required documents.

"If you are a small company, you could spent $50,000 to $100,000 on an offering and raise nothing," Mr. Breeden said.

In addition to increasing the dollar limits, he said, the SEC plans to streamline the forms to cut costs. "We think we can save people millions of dollars by simplifying the forms," he said.

Although the SEC approved agAccess' offering, California's Corporations Commission imposed another set of restrictions. The state will permit Mr. Katz to sell stock only to investors with annual incomes of at least $50,000 and net worths of $100,000, excluding their primary residences.

According to Janet Ader, who is handling the offering at Progressive Asset Management, California regulators consider investment in agAccess to be highly risky because the stock is not publicly traded and investors could not sell it easily.

Meanwhile, Mr. Katz is moving ahead, optimistic that the stock offering will bring in the cash he needs to publish more books and increase distribution of its mail-order catalog. The company sells about 10,000 books and has about 12,500 customers. Subjects range from how to speak Spanish to farmworkers to how to maintain an "edible landscape."

Mr. Katz's tips for entrepreneurs considering a public stock offering:

* Determine whether you have natural constituency of people interested in buying your stock, including your customers.

* If you use a broker, have a clear understanding of what you expect the broker to do and ask the broker to spell out all financial arrangements.

* Hire a lawyer who really understands the Reg A process.

"And remember, it takes more energy than you think," Mr. Katz said.


Ever optimistic, 87 percent of the small-business owners polled in a recent survey said that despite the recession and tough times, they would start their businesses over again given the chance. Still, 56 percent said they are more afraid to take risks, and 53 percent said they feel more stress than they did before the recession. The survey was conducted in May for MasterCard BusinessCard by Penn & Schoen Associates.


AT&T is donating use of its Language Line service to help the Small Business Administration process disaster loan applications from the recent riots in South Central Los Angeles. More than half of the applicants speak a primary language other than English, said SBA regional administrator Oscar Wright. Language Line offers over-the-phone interpretation and document translation in about 140 languages.

The company, founded in 1984 by a San Jose, Calif., police officer and a ex-Marine Corps interpreter, was established to help local police and emergency officials communicate with residents speaking 41 languages. AT&T bought the company in 1989 and expanded the service to individuals and business customers.

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