Electronic public offerings: the cheaper finance alternative

Technology comes to the rescue of small firms faced with an unexpected growth opportunity, but without the cash to exploit it.

Small firms in need of cash to fund expansion may find that there is a cheaper and more convenient alternative to bank loans or venture capital finance.

The growing popularity of stock ownership, together with the recent proliferation of innovative, fast-growing firms in the hi-tech sector, have spawned a new breed of retail investor keen to buy into small companies with big ideas. The internet, meanwhile, has made it possible for firms in need of a cash injection to communicate cheaply and effectively with these investors for the first time.

As a result, it's boom time for electronic public offerings, or EPOs. Over 100 European stock flotations have taken place online in the past two years, and there are many more to come, says Ola Lauritzon, CEO of leading online underwriter epo.com.

epo.com has handled 55 of these in Germany, Sweden, and the UK so far, building up a network of 175,000 private investors in the process. French, Italian, and Spanish offerings are currently in the pipeline. Subscriptions lodged with epo.com by share-hungry investors so far total ({@denom})2.5 billion, substantially more than the total value of the shares the company has placed on the market.

[EPOs] give companies access to a group of investors which has up until now been elbowed out of the market. The potential is huge, says Lauritzon. He added that two years on from the first EPO, online flotations are no longer the exclusive preserve of innovative, hi-tech start-ups.

The chief advantage of online flotations, apart from their low cost, is that potential investors - usually private individuals who are already regular visitors to investment websites - can be easily targeted. Investor information can be downloaded from the web, and shares can be bought online using direct debit cards or bank transfers, slashing transaction and postage costs.

Although companies such as epo.com largely fulfill the traditional role of the underwriter in online flotations, most EPOs are also overseen by an investment bank, which advises on how to structure the offering. The bank will generally also prepare the company prospectus distributed to potential investors.

Placing shares on smaller exchanges such as Ofex in the UK or Germany's Neuer Markt is the most cost-effective approach, given the smaller size of most firms involved. Such exchanges don't require that IPOs have the backing of licensed market-makers, who usually charge high fees.

In the UK, a recent IPO which raised ({@denom})1.2 million on Ofex cost a total of ({@denom})150,000, against ({@denom})350,000 for a similarly sized flotation on London's larger and more tightly regulated Alternative Investments Market. Market-makers' fees accounted for most of the difference, Ofex sources say.

A flotation on the full London Stock Exchange, meanwhile, is prohibitively expensive for the vast majority of SMEs. The Big 5 accountancy firms generally advise their UK clients not to bother unless their revenues total at least ({@denom})8 million a year, including a minimum of ({@denom})1 million profit.

Guy Boursot, Managing Director of Hungerford-based Boursot Wines, recently took his company public with an online flotation, raising ({@denom})200,000 through the sale of 4 million shares at 5 pence each on Ofex, and acquiring 95 new shareholders in the process.

Although the costs incurred were enormous, the money raised came cheaper than it would have done through borrowing, or approaching a venture capitalist, he said.

Long term, this is a more sensible option. It's the least burdensome and fastest way to grow a company, he added. The EPO attracted a huge number of requests, with Boursot attributing the level of interest to the hype that currently surrounds the dotcom industry.

Traditional financing is drying up in favour of the dotcoms. We jumped on that bandwagon to a certain extent, he said.

However, he cautioned that the online flotation process isn't without its drawbacks. While some investors downloaded prospectuses, many others requested information and bought shares through the post, unexpectedly ramping up transaction costs.

Analysts add that while EPOs allow small firms to float, their money-spinning potential is for the moment limited by the lack of liquidity in the markets where most of the stock floated online ends up. Ofex in the UK for the moment lacks the facilities for online share trading, and the cumbersome 'daily settlements' procedure that applies to all UK stock markets also deters many would-be online equities traders.

But this may change. Most exchanges are busily installing online dealing facilities, and once the security issues surrounding internet transactions are resolved, EPOs could well become the norm.