From a regulatory perspective, DPOs face the same challenges as underwritten IPOs. That is, companies that want to raise more than $5 million and want to trade on a stock exchange or the top two tiers of the Nasdaq stock market must file a registration statement with the Securities and Exchange Commission (SEC). This is a major undertaking.
Businesses that need less money and are more flexible in their requirements for aftermarket trading may enjoy less burdensome regulatory challenges. For instance, companies that want to raise less than $5 million can take advantage of the exemption from federal registration by filing under what is known as Regulation A of the Securities Act of 1933, which Quinn used for Hahnemann's offering.
Companies that want to raise less than $1 million in a DPO may take advantage of the Small Company Offering Registration (known as SCOR), which is accepted in 43 states and requires almost no filings with the SEC. The SCOR form, also known as Form U-7, is still no day at the beach, however: It has several parts, and once complete, looks suspiciously like a prospectus.
One of the real advantages of these unregistered offerings is that in many cases, a company's shares can still trade on the Nasdaq Bulletin Board, which is the next-to-the-lowest tier of the Nasdaq stock market. Remember, to trade on the Nasdaq SmallCap Market, the Nasdaq National Market System or any of the major stock exchanges, companies must periodically report to investors via the Securities Exchange Act of 1934. This adds a host of requirements that a very tiny public company that just completed a very tiny DPO may not want to burden itself with. Trading on the Bulletin Board eliminates these headaches.
For his part, Quinn has not been too concerned with aftermarket trading. He has left that to a stockbroker who keeps a book matching buyers and sellers. But most of the investors are holding onto their shares, says Quinn. The company's upside potential seems to be the reason: "It would be nearly impossible for one of the major pharmaceutical companies to grow 10 times bigger," he says. "But we definitely can."