A Stock Exchange In Cyberspace?

Microbrewer Andrew Klein talks about his maxi ambitions

Too tiny to tempt Wall Street and too tenacious to surrender to venture capitalists, Andrew Klein turned to--where else?--cyberspace. In March, his Manhattan microbrewery, Spring Street Brewing Co., completed the first-ever online public offering, raising $1.6 million. Now, Klein is forming Wit Capital Corp.--named for the Wit Beer he brews--an investment bank and World Wide Web-based stock exchange. Klein talked with Small Business Editor I. Jeanne Dugan.

Q: Spring Street began in 1992 with $500,000 raised through private placement. How did you get from there to $1.6 million?

A: Like most small businesses, I started by getting $5,000 or $10,000 from former colleagues, friends, friends of friends. Then I needed more. You can't go to acquaintances and get $3 million. You can't get Goldman Sachs to do a public offering of a company that's only got $400,000 in sales. They won't touch you. So what's left are the venture capitalists. And they know it.

Q: Did you consider that route?

A: Yes. For six months, I talked to all the big venture-capital firms. Everybody wants you to come to three meetings, prepare four sets of projections, seven different business plans. And then, the offers start coming in. It would be kind to characterize them as harsh.

Q: What was the alternative?

A: Even before we had the idea to use the Internet, I made the decision to try to market our stock to beer enthusiasts. I thought if we wound up with thousands of stockholders who owned a little piece of our beer company, they wouldn't cause me headaches and would help me market the beer. I looked at some prospectuses from other beer companies. I had the advantage of being a lawyer and was able to write my own offering and file it with state regulators and the Securities & Exchange Commission. I got clearance in about eight weeks.

Q: But how did you reach investors?

A: I got the idea from Ben & Jerry's, believe it or not. Back in the late 1970s, when they were a tiny little ice-cream company, they advertised their stock on the back of their ice-cream containers. So we put little notices in our six-packs and posters in bars and restaurants offering a highly illiquid, highly risky stock, but one that offered long-term real growth potential. The minimum investment was just 150 shares at $1.85 each.

Q: How did you end up on the Internet?

A: It was really as simple as waking up one morning and thinking: Why not also sell it on the Internet? You have to live under a rock not to know that the Internet is a powerful tool. So I had a Web page designed and put up our prospectus. I took out ads, sent notices to Web catalogers, and got a lot of media attention.

Q: Who responded?

A: Largely beer enthusiasts. I had a few people from far away--South Africa, Iceland, the Far East. It was a bit funny that a guy from Iceland would want to pay $277.50 for stock in a beer he'd never tasted, but this was the Internet.

Q: What was the biggest problem?

A: Ironically, a lot of people who wanted to invest didn't know anything about the Internet. So they called. We got so many phone calls that at certain points, we couldn't handle it. In just a few days, we got 6,000 or 7,000 calls, and there were only three of us. We had one person doing nothing but emptying the voice-mailbox, which held 50 messages, and still, it kept overflowing.

Q: How did you sell your shares?

A: We set up a database--typed their names in, addresses, Social Security numbers, phone numbers, the number of shares they wanted--pushed buttons and printed stock certificates. When people sent us a check, we sent them the stock.

Q: When your stock began publicly trading after the initial public offering, what was the clearing mechanism?

A: We had buyers send the money to us. We deposited the check. The sellers sent the stock certificate to the company. When the check cleared the bank, we would send the money to the seller and the new stock certificate to the buyer, and protect everyone. But the SEC asked us to hire a bank to act as the escrow agent. Until we do that, the public quotation of the stock and the Internet trading are suspended. We're projecting now it'll be back online by May.

Q: Meanwhile, you plan to apply to the SEC and state regulators to become a broker-dealer and a stock exchange?

A: Yes. We want to create an Internet-based stock exchange where companies can list their stocks and investors can buy without a broker. Our computer will match the best order to buy with the best order to sell. They'll be taken out of the system and taken to the back office for closing. The system will then automatically update the digital equivalent of the ticker tape. We're talking about using the Internet to cut out not only the brokerage community but the New York Stock Exchange and NASDAQ as well.

Q: But you'll have fees, won't you?

A: We won't charge any fees or commissions to the persons who are trading. All of our revenue will be derived from fees and commissions from companies who use our services to raise capital, come to the public, and then ultimately list their stock on our exchange. They'll be in line with traditional investment-banking fees.

Q: Can't a company just set up its own Web page and post its own prospectus?

A: Anybody can do what Spring Street did. But then how do you bring people to your Web site? Spring Street was successful, in part, because it was the first. It's going to be very hard for the next company and the one after that and the 500th.We've already been contacted by more than 600 companies. A lot of high-technology companies, of course, a lot of companies that already have some nexus with the Internet, are the most likely candidates to be successful immediately, because they already have some presence on the Internet.

Q: Critics say the system of trading stocks online is dangerously susceptible to manipulation and fraud.

A: I don't think so. The SEC will fully regulate our activity as a stock exchange. We will have to demonstrate that this system is secure technologically--the same challenge faced by banks and credit-card companies that want to do online transactions. There's no more reason to suspect that there will be fraud than in any other financial intermediary. The Internet is the ultimate of public forums, so all the activity that happens there is accessible by the SEC and state regulators.

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