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Private offerings of stock help fuel young area firms

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    Myrna Graham works with DNA at Gene Express lab.

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    Dan Baker checks Internet servers at TotalLink facility.


Myrna Graham works with DNA at Gene Express lab.


Anybody can buy stock through a broker - shares that are listed on the New York Stock Exchange, Nasdaq, or even as lesser-known “pink sheets” securities.

But there are some issues that most investors will never even hear about, much less get the chance to invest in. Many private-placement stocks and partnership shares in limited-liability companies are offered only to high rollers - investors who are millionaires or who have very high incomes.

But don't feel left out. Seasoned investors say private stock offers are not for the average person.

“They are very risky,” said Chester Devenow, retired chairman of the former Sheller-Globe Corp., a Fortune 500 company until it was taken over in the 1980s. “You are lucky if you can hit one out of four or five at times.”

His personal track record is two out of every three he has invested in have been successful, he said, but only because he is very selective.

When one does click, the returns can be fantastic, said James Smythe, founder of Habitec Security of Toledo, who has invested in a number of startup technology firms, including some in the Toledo area.

“It's a great learning curve,” he said. “You can see it work. The [fledgling firms] create local jobs.”

More wealthy investors in the Toledo area should be investing in startups, he contended. “They're very important to Toledo's comeback. We have to get all these people who have money to invest locally ... I'd rather invest in Main Street than in Wall Street.”

Another incentive, he explained, is the Ohio technology tax credit that rewards investors in small Ohio-based technology companies with a tax credit of up to 25 percent of their investment, with a maximum credit of $37,500.

It is restricted to stock in companies with annual sales of $1 million or less.

Hundreds of stock offerings aimed mainly at the wealthy are floated in Ohio each year. Typically, such investors have a net worth of at least $1 million or income above $200,000 for two straight years ($300,000 if joint income with spouse).


Dan Baker checks Internet servers at TotalLink facility.


Such private-placement stock usually is not registered, as is stock of public companies. Instead, offering firms sell the stock under one of the dozens of registration exemptions allowed by the U.S. Securities and Exchange Commission and state regulators like the Ohio Division of Securities. Some private stock for very small companies, such as a family business, might not require even as much as a notice to the federal or state government. Most offerings, however, are reported to the governments.

About 1,200 such offering notices have been filed in Ohio the outset of 2002, but fewer than 200 are from Ohio-based firms, state records show. Most of the rest are national mutual funds, multistate oil-and-gas ventures, and technology firms selling stock in a number of states.

In that group were 10 Toledo-area companies, seeking about $13 million. Some want the money to fund acquisitions, some to take technology startups to a higher level, and others to expand existing, long-standing small businesses.

The funding technique has been used with great success locally to finance startups of financial institutions. The former Capital Bank in Sylvania, which is now part of Fifth Third Bank, raised nearly $13 million that way in 1988-89; Holland's Trust Co. of Toledo raised about $3 million in 1990, and the new Signature Bank got about 430 well-heeled investors to put up an average of nearly $50,000 each in 2001 for a total of $20 million.

Among the believers in private stock placements is Michael Cicak, retired executive from several Toledo-area corporations. He has invested in 13 high-tech companies, culled from about 125 prospects.

“I try to invest enough to where I can have a fairly decent say-so and go on the board,” he explained.

Mr. Cicak and Mr. Smythe are general partners in a local technology firm, TotaLink, LLC, that has floated a couple of private stock offerings in two years. In the most recent, the Internet service provider in downtown Toledo sold $610,000 worth of units less than a year ago. All together, the firm sold a 30 percent to about 20 investors for $1.1 million, said Mr. Smythe.

Gene Express, Inc., an 11-year-old biotechnology firm based at the Medical College of Ohio's technology park, started selling $2 million worth of stock last month to supplement a $1 million research grant from the state of Ohio to pursue its cancer-detection technology. The company last year proposed a $7.5 million offering but withdrew it, and may seek another $6 million to $8 million in private investment once its management team is in place.

“I think we're on the cutting edge,” said Dr. Terry Osborn, president and chief executive of the firm, and a biochemist. “It's a long haul, but we're making progress.”

Several years ago, Impact Products, a 40-year-old, employee-owned maker of sanitary and janitorial products in Sylvania Township, sold out to a New York investment firm for about $23 million. Since then, said President John Harbal II, the company has issued about $2.2 million in private placement stock, partly so managers could buy a stake in the firm and partly to acquire another manufacturer.

Not all private offerings get off the ground. Last year, for example, several backers filed to offer $1.2 million in partnership units for PlanetX, LLC, which proposed to build a regional recreation center in Sylvania Township.

The minimum investment was $20,000, but the firm didn't raise the needed capital and abandoned the idea, said an attorney who filed the securities paperwork.

It's uncertain how many investors with enough wealth or income to qualify for such solicitations live in the Toledo area.

But U.S. Census reports show that about 3,600 households in the metro area have incomes of $200,000 and up. And an estimated 4 percent of American households have net worth of $1 million or more, so if this area is close to the national average, there could be about 9,000 in the Toledo area and perhaps 15,000 in northwest Ohio.

But experts say only a fraction of those would attempt anything as risky as private stock - perhaps 1,000 or so.

“There's quite a bit of wealth out there,” said Thomas Webb, Jr., an attorney with Shumaker, Loop & Kendrick, a law firm that handles a number of private placements. Still, he said, those investors need to be savvy and capable of understanding the risks and possible loss.

Regulators have considered raising the qualifications: Income and net-worth standards haven't changed in two decades.

“When the stock market was going crazy, in the 1990s, there were secretaries at Dell Computer [worth] a million dollars,” said M. Scott Aubry, an attorney with Shumaker, Loop. That's not what the SEC had in mind for qualifying investors for private stock offerings, he said.

Among the private-stock offers in the area are some that haven't yet hit the state regulators' radar screen. For example, Leisure Direct, Inc., in Perrysburg, last month began pitching a stock offering for $500,000 to qualified investors but has not filed with Ohio.

The firm, an outgrowth of Olympic Pools, a Toledo-area swimming-pool installer, proposes to market swimming pools on the Internet and through TV infomercials, said Terrence Meyer, director of sales and marketing.

The firm has raised $250,000 so far, in lots of $5,000 to $50,000, and plans to sell publicly available stock this year, he said. He added that the company qualifies for one of the many Ohio registration exemptions for private-placement stock.

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