An Open Letter to Ann Amioka, California Chamber of Commerce

The following is part of an “open letter” project by MBA students at the Presidio Graduate School in the Capital Markets Spring 2012 class.  Read the rest here.

JOBS Act Highlights the Need for Alternative Funding Options for Small Business 

Dear Ms. Amioka,

With the progress of the Jumpstart Our Business Startups (JOBS) Act through Congress, the country is paying a significant amount of attention to the regulatory burden on young companies. While we recognize the importance of this conversation, we believe that smaller, instate companies building long-term sustainable funding structures have a good option for public funding that already exists. We have identified the Direct Public Offering (DPO) as a means of gaining public financing for companies too small to use the traditional Initial Public Offering (IPO) process. We believe it may be a catalyst in the California Chambers’ Renew California Plan because it is a means to access public financing, and as such, aligns with one of the Chambers’ pillars of small business.  We believe that your members should consider this option more aggressively when trying to finance long-term growth.

Many companies seeking public funding find themselves locked into a superheated race to grow. In order to conduct a successful IPO, the company needs a potential market capitalization of over $500 million to attract an underwriter. Growing to that size typically requires Venture Capital (VC) investment. VCs desire to own less than 20% of a new company and to earn more than $100 million for their investors in five years. To meet these targets, the company must grow quickly and then go public or sell. While this model makes sense for some, many of your members may find this an untenable growth rate because their market size does not support such a large capitalization or the business owners plan to grow the company differently.

When a company desires public equity funding, but does not want to pursue venture funding, the DPO may provide a superior approach. The process is typically shorter than an IPO and far less expensive. If the company conducts substantially all of its business in one state, then the Intrastate Exemption of SEC Rule 147 allows corporations to offer securities to the public within that state. For your members seeking local support of their company, this limitation can become an advantage as investors from a single state become owners and supporters of that company.

The California qualification (registration) is a specific DPO procedure designed to standardize the disclosure process. This process is simpler than registering nationally, and is appropriate for established California companies with the ability to execute complex securities transactions while maintaining a solid business. Accounting, legal representation, and standard financial statements are required along with maintaining shareholder relationships, just as any public company does. The company is exempt from lengthier filing requirements of the Securities Exchange Act of 1934 and Sarbanes-Oxley 404, but the antifraud provisions of Section 17 of the Securities Act of 1933 apply. To companies possessing these characteristics, DPOs may provide the ability to raise investment capital without losing control of day-to-day operations and the very attractive possibility of finding local investors who believe in the company’s mission.

Successful DPOs are associated with companies with large, strong, affinity customer groups. For example, Portland Brewing executed four DPOs, and the first one used the intrastate exemption within the state of Oregon. The $500,000 offering sold out in three days.  Another example, Mendocino Brewing Company located in Hopland, California, raised $3.6 million in 6 months.

Given the role of the Chamber within California, we recommend that your organization look into DPOs as a method of sourcing capital for local companies pursuing long-term sustainable business models.  When your smaller members are looking for funding, please have them consult a knowledgeable firm, such as Cutting Edge Capital that specializes in selecting a financing strategy and, along with the law firm Katovich & Kassan Law Group, provides the legal services to complete it. For more information on why we believe this is a good strategy, please contact us.


Tiina Seppäläinen, John Talbott, Margy Titus

Tiina Seppäläinen, John Talbott,  and Margy Titus study sustainable management practices at the Presidio Graduate School in San Francisco.


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