Raising capital is never easy, unless you have a rich uncle not averse to the odd gamble. The banks are probably the easiest route but you have to repay with interest.
Raising capital through the sale of shares is attractive, and innovative stockbrokers are now using the internet to reduce the cost and lead time in raising capital by selling shares to the public.
Potential investors apply online for an allocation of shares in response to an online prospectus. They receive, online, notification of their share allocation. The only paper involved in the process is an authorisation form faxed back to the broker. The applicant receives a share certificate in an electronic format but a nominated bank holds the actual certificate.
The US is well ahead in applying the internet to all aspects of business. E*Trade (www.etrade.com), one of the first brokerage houses to offer online share buying and selling, can help companies raise share capital through its E-Offering subsidiary. This offers US companies the ability to raise capital quickly and efficiently. Companies can prepare filings, communicate more effectively with a broader investment base, and complete the share offer as fast as possible at a lower cost.
Bruce Shewmaker, managing director of E-Offering, intends to launch a similar operation in the UK and Europe. In the future he sees the internet playing an important role in raising share capital for companies.
In theory there is nothing to prevent prospectuses being issued to anyone with an email address to solicit funds to get a company off the ground. However, they will be in breach of the Financial Services Act (FSA), which applies to the internet as it would to other approaches such as a letter, a fax or a phone call, if they are not authorised to conduct investment business.
Breach of the act is a criminal offence carrying a prison sentence of two years, a fine, or both. And, the company's promoters could become liable for making restitution if investors suffer a loss. The Financial Services Authority enforces the law and launches some 600 investigations a year. No brokerage firms in the UK yet offer an initial public offering (IPO) facility on the internet. This will change with the arrival of EPO.com, a company specialising in electronic public offerings. Launched in Sweden in September 1998, it claims to have more than 45,000 retail investors on its database.
In the UK alone 1,000 retail investors are added to the database each week. In Sweden, EPO.com has conducted 17 IPOs via the internet and Robin Birchall, corporate finance manager, expects the company to do this in Britain next month. In the short term EPO.com doesn't intend to become the lead broker for an IPO. It expects to get up to 25% of an initial share issue which it will then offer to retail customers via the net.
In Europe, Germany appears to take the lead in this field with Deutsche Bank selling about 10% of each of its German equity offerings online. The Wall Street Journal reported in 1999 that Buecher.de AG, a company selling books over the internet, needed to raise $41m through a public share offering. It turned to German internet broker Net.IPO AG, and raised $110m online from 7,000 investors. In the US, research shows that only certain companies can attract investors to subscribe for the initial share offer via the net. The message is: don't apply if your company is brand new or a start-up with little or no history using low or minimal technology, and has limited growth potential.
Brokers offering to help companies raise capital through the internet will back only those they see as exciting, innovative and technology driven. The internet promises one of the cheapest methods of prospecting for new clients. Birchall believes that the future of IPOs, at least for non institutional investors, will be via the internet and paper-based subscription offers to acquire share capital will become a thing of the past. Once all the regulatory hurdles, in place to protect investors from unscrupulous operators, are overcome by internet stockbrokers, the net may soon become the place not only to sell goods and services but to source that elusive start-up capital.
