"The key to the success of [the DPO market] is an efficient secondary market," Womack said. "Without a secondary market, there is no primary market."
Improved liquidity would no doubt fuel small investors' interest in DPOs. But experts warn mom-and-pop stock pickers to use caution.
Although this new technique for raising capital is no more likely to attract securities scam artists than any other (and arguably less so because there's less money to be made), DPOs are emerging as a last resort for companies unable to raise capital elsewhere, says Blake Campbell, assistant commissioner with California's Department of Corporations.
The means that for every promising venture using a DPO to take its business to the next level, there is an ill-qualified candidate that meets all the regulatory requirements for making the offering but that really has no business going public.
"Some small businesses resort to SCORs and Reg A's simply because they aren't great businesses," Campbell said. "That doesn't mean they're fraudulent. It just means that no venture capitalist or bank would touch them. Investors should take that into consideration."
At a time when the public is still leery of using credit cards on the Internet, much less buying securities of small companies they've never heard of, Reynolds of Cognitive Diagnostics isn't fazed by the steep odds against pulling off a successful DPO.
He says the company is already halfway to its $500,000 goal and is gearing up for an Internet-based ad campaign to reach more potential investors.
"People were afraid of cash machines when they first came out," Reynolds said. "The climate is changing. There is a growing confidence factor in using the Web for financial activity. This is the future."
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Growth in DPOs
Number of U.S. direct public offerings:
1996: 358
Through August 1997: 190
