Ace In The Hole A new online network could unleash a tidal wave of private capital for entrepreneurs.

To understand just how fertile the electronics business is,consider the heritage of Ed Meltzer. His parents' TV and radiorepair shop, started in 1959 in Kansas City, today is not only athriving systems integrator but has also given birth to anotherhigh-tech venture, Intelligent Wireless Systems Inc., of whichMeltzer is president and CEO.

The Prairie Village, Kansas, company designs, develops,manufactures and markets proprietary wireless transceivers for theautomation and control industries. For instance, the company'sAutomated Vehicle Locating and Information System (AVLIS), designedand manufactured for the Kansas City Area Transportation Authority,provides the transit company with up-to-the-minute informationabout how effectively the fleet is serving transit riders at anygiven moment. "The system saves them money," Meltzersays.

The evolution of the Meltzers' company--from a mom and popenterprise serving a neighborhood to a high-tech company developingproducts with global applications--mirrors the changes in theAmerican business scene at large. Although this change has been forthe better, it has also created fundamental shifts in howbusinesses are financed. While his parents could throw theirsavings into opening a storefront business and, through diligentreinvestment of profits, create a prosperous family enterprise,Meltzer cannot.

Why? Because like most technology-driven companies, he must poura fortune into research and development, and then chase down vastnew technology-driven markets that materialize quickly and growexponentially. Under this regime, the old model of reinvestingprofits just doesn't work. Today, the opportunities facing manycompanies demand large quantities of patient, permanent equitycapital upfront. For Meltzer, this upfront requirement was nearly$1 million.

In July 1996, Meltzer put together a Small Company OfferingRegistration (SCOR) deal for $945,000; it was approved for sale inKansas and Missouri that fall. Meltzer hoped to close the deal byyear-end, or at least reach a minimum of $671,000 in investments.But as of February 1997, his commitments totaled just $400,000.

Is something wrong with Meltzer, Intelligent Wireless or thedeal? None of the above. The problem is that while the company ison the cutting edge of technology, Meltzer must contend with arcaneways of raising capital that, in the context of today's rapidpace, seem to take forever.

Specifically, Meltzer, like thousands of entrepreneurs beforehim and thousands more to follow, must slowly, methodically andexhaustively beat the bushes for investors. Then he must physicallyget himself in front of each one, make the pitch, and follow upuntil the check is in the mail. "To get the $400,000 committedso far," says Meltzer, "we went through about 100investors." To get the second half of the deal done, Meltzerestimates he'll go through another 100 or so. Oyvay!

Happily, there's a better way, and Meltzer plans to takeadvantage of it. It's called ACE-Net, which stands for theAngel Capital Electronic Network. ACE-Net is a project sponsored bythe Small Business Administration (SBA); after years of publicpolicy debating, lobbying, and nurturing at universities andeconomic development organizations, the system became operationallast year.

According to Terry Bibbens, entrepreneur in residence at the SBAOffice of Advocacy and one of the program's many architects,ACE-Net is "an Internet-based network that provides newoptions to small companies looking for capital and newopportunities to so-called `accredited investors' looking forinvestment opportunities." Bibbens says ACE-Net removes manyof the limitations entrepreneurs traditionally face when trying tolink up with angels (wealthy investors) on a nationwide basis.

Nuts And Bolts

Listings of stock offerings on ACE-Net are found through anonline search engine that permits investors to find the type ofcompany, technology, investment size or geography they are lookingfor. Once the information is found, the investor can review ordownload the forms filed by the listed companies. If the investorwishes to purchase stock, he or she can then contact the companydirectly.

According to Bibbens, companies that want to be listed onACE-Net must go through one of several nodes, or network operators.Eight initial nodes have been designated; as of the first quarterof 1997, four were operational, with others scheduled to be onlinethis month. The four operational nodes are the Technology CapitalNetwork at Massachusetts Institute of Technology in Boston; TheCapital Network Inc. in Austin, Texas; Accelerate at the Universityof California, Irvine; and Advance Technology Development Center atthe Georgia Institute of Technology in Atlanta.

As for the investors, access is limited to accreditedinvestors--defined by the Securities and Exchange Commission as,among other things, individuals who have a net worth or joint networth with a spouse in excess of $1 million, or have net income inexcess of $200,000 or joint income with a spouse in excess of$300,000 in each of the last two years and expect similar income inthe current year.

Limiting access to accredited investors offers participatingentrepreneurs a real advantage, says Bibbens, because it puts themin touch with individuals who have not only the interest but alsothe financial wherewithal to invest in their companies.

Indeed, ACE-Net is no mere electronic coffeeklatsch. ACE-Netlistings consist of actual offerings that are exempt from federalregistration under Regulation A or Regulation D. In other words, tobe listed on ACE-Net, a company must be doing a Reg A or Reg Ddeal, not simply shopping a business plan. In addition, the form(U-7) used to file for a listing on ACE-Net is a SCOR form. Fillingout a SCOR form is no walk in the park. Says Bibbens,"Entrepreneurs should not attempt to use this avenue without asecurities attorney."

Big Business

The importance of ACE-Net cannot be underestimated. Bibbens saysthe most popular estimate of the amount of equity capitalAmerica's emerging new enterprises need is on the order of $60billion each year. While angels are capable of making asizable dent in this need, time and place constraints such as thosefaced by Meltzer, to say nothing of the regulatory barriers, haveuntil now kept entrepreneurs
from easily tapping angels' resources.

The reason for the problem comes down to just one word:efficiency. Among brokers, traders and professional investors, thisterm has a precise meaning. Specifically, it refers to the speedand proficiency with which information is disseminated. The moreefficient a market is, the theory goes, the more buyers and sellersare attracted to it because they can make investment decisionsbased on knowledge of all relevant facts that are available.

Under this definition, it's also easy to see just howinefficient the market is for private capital. Distributinginformation among private investors is difficult. There's nouniformity. Buyers and sellers have wildly diverse agendas.

And this is precisely where ACE-Net can make such afundamentally important mark: It dramatically increases theefficiency of information distribution. In fact, within thestrictest constructs of the discipline, ACE-Net mirrors themechanisms of any stock market by matching buyers and sellers withuniform information. When this happens, capital flows morefreely.

For entrepreneurs like Ed Meltzer, that's certainly theexpectation: "My hope is that 30 days after going up onACE-Net we will be fully funded."

For more information on ACE-Net, visit (http://www.sbaonline.sba.gov) or(http://ace-net.unh.edu)., orcontact Jere Glover, Chief Counsel of the SBA's Office ofAdvocacy, at (202) 205-6533 or (202) 205-6928 (fax).

Contact Sources

Intelligent Wireless Systems Inc., 7301 Mission Rd.,#206, Prairie Village, KS 66208, (913) 362-0900;

Small Business Administration, Office of Advocacy, (800)8-ASK-SBA, (202) 205-7749, (http://www.sba.gov/ADVO/).

David R. Evanson, a writer and consultant, is a principal ofFinancial Communications Associates in
Ardmore, Pennsylvania.