Publicly Traded Firms Take Advantage of the JOBS Act to Raise Money
Salon Media CEO Cindy Jeffers says the fundraising would fuel an expansion that 'leads us to profitability.'
Federal lawmakers eased decades-old U.S. securities regulations in 2012 in the name of eliminating red tape for young startups.
But now another breed of business is angling to take advantage of the Jumpstart Our Business Startups Act: publicly traded companies, some of which have been in business for many years.
Salon Media Group Inc., SLNM +31.03% a 19-year-old financially struggling Internet media company, and Giggles N Hugs Inc., GIGL +2.00% a seven-year-old food-and-play-space chain, are among dozens of publicly traded firms that have indicated they intend to solicit investors using the new freedoms in the JOBS Act. Both trade on the over-the-counter market, and auditors have raised concerns about their ability to continue operations.
The companies are seeking new investors using a portion of the JOBS Act that lets small private firms advertise to wealthy individuals, known as "accredited investors," modifying an 80-year-old "general solicitation" advertising ban designed to protect investors.
The firms' use of marketing freedoms intended for young startups illustrates how an unexpectedly broad range of players hope to gain an edge under the new law. "You can put it into the category of unintended consequences," says New York securities lawyer Douglas Ellenoff, referring to the use of the JOBS Act by publicly traded companies.
"The whole point" of the law "was to make it easier for private companies to raise money," he adds.But the use of the new rules by publicly traded companies "is perfectly permissible," says John C. Coffee Jr., a professor of securities law at Columbia University. He also says he doesn't see "any harm" in the use of the new rules by publicly traded firms.
So far, more than 1,600 companies—including three dozen publicly traded ones—have indicated their intention to take advantage of the new marketing freedoms, according to filings made with the Securities and Exchange Commission between Sept. 23, 2013, and June 30.
Other companies, including San Francisco-based social-media company Twitter Inc., TWTR +1.51% used other provisions in the JOBS Act to their benefit in the past. In 2013, for example, Twitter used a set of rules in the law that allow growth companies with up to $1 billion in annual revenue to file confidential filings in connection with an initial public offering. In doing so, Twitter kept under wraps details about its profitability and the kind of risks it faced until about three weeks before it pitched its stock to investors.
Salon, which currently has a market valuation of less than $30 million, has a different agenda in using the marketing freedoms provided by the new law. The media company has filed detailed financial information with the SEC since it went public 15 years ago. Recently, it lined up a third-party fundraising platform, Deal Labs Inc., to send emails to 80,000 potential investors describing Salon as an "award-winning online news Website" with more than 17 million users. "Please see the specific risks," reads one line in small type at the bottom of the email that directs investors to the information about those risks.
Among those risks: Salon's current auditors have, since 2011, warned that they have substantial doubts about the company's ability to continue its operations, citing issues such as the company's history of losses. Salon went public in 1999 at $10.50 a share and is now selling stock at 25 cents a share.
Salon's SEC filings show that its losses increased 29% compared with a year earlier to $900,000 in the quarter ended June 30, while revenue was flat. Salon CEO Cindy Jeffers blames General Motors Co. GM +1.29% 's move to cut back on a planned ad campaign.
"It makes sense" for a company that operates a Web site covering politics, entertainment and other topics "to use all the innovative technologies," she says of the decision to raise money online. In the past two years, Salon has experienced "unprecedented growth" in the number of "unique visitors" to the Salon.com site, she adds, and a successful stock offering will fuel an expansion that "will lead us to profitability."
One overview of the Salon offering states that it has so far raised $1 million of the $3 million it seeks, but it doesn't note that the sum represents a commitment from Salon Chairman John Warnock, a co-founder of Adobe Systems Inc. Mr. Warnock has funneled roughly $14 million into the company over the last five years, Salon says. The omission is "to be respectful of John," says Deal Labs Chief Executive Aaron Travis. Salon's "traffic is growing quite remarkably since Cindy Jeffers took over as CEO," says Mr. Warnock. "All the indications for me are positive."
Salon and Deal Labs are "in conversations" with about 20 potential investors, including a handful who have made verbal commitments to invest in the offering, Mr. Travis adds. Deal Labs collects a commission on the amount raised.
Giggles N Hugs, the Los Angeles-based family-restaurant chain, this month emailed roughly 20,000 customers with "Opportunity to invest" in the subject line. "We hope that you, our loyal customers, will participate in our growth objectives and become stockholders," Joey Parsi, the company's founder, wrote in the pitch.
In 2012, he says, he merged Giggles N Hugs with a publicly traded company that had no operations because he thought being public would make fundraising easier. Instead, he says, the small company found itself in a fundraising "no man's land." Giggles N Hugs lost $984,000 on sales of $1.6 million in the six months ending June 29, 2014, according to SEC filings.
Mr. Parsi says small companies like his "need additional capital to succeed." It has three California locations today, and he hopes to add five locations over the next year and expand into franchising and the licensing and merchandising of branded products. So far, he says, the company has secured roughly $1.2 million of the $2.6 million it seeks.
Lattice Inc., LTTC +6.52% which provides secure communication services to prisons, spent less than $15,000 on its recent JOBS Act stock offering. That's far less than the more than $100,000 it would have cost the Pennsauken, N.J.-based telecommunications firm to raise the same amount in a traditional private placement, Lattice CEO Paul Burgess says.
Lattice had a $779,000 loss on sales of $4.6 million in the six months ended June 30, according to its SEC filings. In all, it raised roughly $1.1 million from investors who knew the company or people connected with it to fund the company's continued expansion.