Josh Reynolds has always been something of a New Age pioneer.
A biofeedback clinician-turned-inventor, the Newport Beach-based entrepreneur gave the world the Mood Ring and was the muse behind the ThighMaster exercise machine. Now he's heading a start-up called Cognitive Diagnostics Inc., which is developing intelligence-enhancing "brain software" for people worried about keeping their gray matter in shape.
But it is Reynolds' method for raising $500,000 in capital for the venture that is truly unorthodox. Cognitive Diagnostics is marketing stock directly to the public via the Internet, without the aid of underwriters, brokers and other high-priced Wall Street players.
"As a pioneer, you end up with a lot of arrows in your back," Reynolds said. "But I want to give investors direct and easy access to stock ownership."
Ignored by investment banks, snubbed by lenders, a small but growing number of firms like Cognitive Diagnostics is making an end run around Wall Street and going straight to Main Street for capital.
Known as direct public offerings, or DPOs, these do-it-yourself stock sales are the product of changes in federal securities laws that make it easier for the small fry to go hat-in-hand to the public without the expense and red tape of conventional public offerings.
More than 350 companies gave it a try last year. That's up from just a handful in the early 1990s, thanks to an insatiable demand for capital by small businesses and to growth in Internet technology that has given entrepreneurs an inexpensive way to market these deals.
But don't break out the champagne for that "going public" party just yet. Experts say these securities remain a tough sell given their lack of liquidity. And they caution investors that just because a company can post a prospectus on the Internet doesn't mean it's ready to go public.
At least two-thirds of the 1,200 or so companies that have attempted DPOs since 1990 have failed to attract enough investors to complete their offerings, according to Tom Stewart-Gordon, publisher of the Dallas-based newsletter SCOR Report.
Still, firms that have succeeded predict the market for DPOs will continue to expand, providing an important new source of capital for small businesses willing to endure the rigors of going public.
"It was a tremendous commitment of time and energy, but it was well worth it," said Michael Quinn, a manufacturer of homeopathic remedies who raised $476,000 to build a new laboratory in Northern California. "After all, the bank certainly wasn't going to lend it to me."
