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10  Direct Offerings, Shells , and Equity Takedowns
The conventional process of issuing equities is quite complex and expensive.  Some
entrepreneurs are looking for ways to avoid the complexities and expenses. On the other
hand, for investment banking finns lacking strong client relationship, it is difficult to
compete for clients in the equity issuing market.  Direct offerings, shells, and equity
takedowns are the possible alternatives.
Direct Offerings
The expenses associated with raising capital in the equity market are very high.  Now
Intemet offering (or direct offering ) is available, through which the issuing company
bypasses the underwriters and brokerages. The 1996 IPOs of Spring Street Brewery and
Logos Research Systems are the first of the so-called do-it-yourself initial public offerings.
On November 14, 1997, the Green Bay Packers, Inc. offered the sale of 400,000 shares
of its common stock at a price of $200 per share online.
      Entrepreneurs plan to launch virtual stock exchanges and online investment banks
because they believe that they will reach retail and institutional investors more efficiently
and cheaply.  Softwares have been developed to help companies draft their own
prospectuses. New brokerless electronic divisions are set up that use the Intemet to sell
stocks, mutual funds, and IPOs at the same rates given to institutional clients. E-Trade,
Direct Stock Market, and Wit Capital are all working to build an Intemet stock exchange.
However, the Web's uses will be limited until the legal and regulatory issues are resolved.
Major Wall Street firms think that most corporations still need investment banks to do the
bulk of their financing. They have the ability to provide liquidity by market making in the
secondary market.
Shells
A public shell is another alternative that entrepreneurs can consider in their quest for going
public. A shell is an inactive public company with securities traded in the marketplace. It
can be used as a backdoor way of becoming a public company.
     The easiest way to become a public company is to merge into the public shell. One
big advantage is the time and money saved. There is no need to obtain the SEC approval of
the registration statement.  The entrepreneurs pay little to "acquire" the shell.  The
 entrepreneurs essentially purchase control of the shell by buying stocks from the existing
controlling shareholders. The price of acquiring a shell ranges from $20,000 to $100,000
or more, depending on factors such as the amount of control, board seats, and reporting
status. After completing the acquisition, the company could meet the objective of raising
money in the capital markets by issuing stock.
     Shells have been around for a long time. Many of the new shells were first set up in
Utah, which has been a continuing source of supply. Shell brokers have negotiable fees
and often retain some of the stock. This approach is legal.  However, there have been
abuses. In the late 1950s, the SEC prosecuted Alexander Gateman and Lowell Burrell,
who manipulated stocks by spreading rumors to push up share prices and then unloaded
their stock. Such operators are still around today. These con artists target small private
companies with alluring lines of business, and promise their founders financial assistance.
They convince the entrepreneurs to merge their private company with the public shell,
getting public listing with minimum disclosure. The next step is to dress up the company
by pumping in money and in some cases also acquiring other ventures.  Meanwhile, the
scheme operators take control of the board. The purpose is to authorize issuing millions of
shares and to register them through SEC loopholes, such as Form S-8 and Regulation S.
Form S-8 allows a company to register shares with a short filing with minimum disclosure.
It pertains mainly to employees and consultants. Another loophole involves SEC Regulation
S. It permits companies to sell shares to foreign investors without detailed registration
statement, and the shares need to be held for only 40 days before the foreigners can trade
them back to the U.S.  market. The SEC has proposed to lengthen the holding period
requirement for such securities.
      This type of fraud is difficult to detect and prosecute.  In contrast, another type of
fraud is about dubious initial public offerings.  Investors are lured into a penny stock
(usually stock at less than $5 per share in a company without a track record) by hard-sell
tactics, bait tactics (which wins investor confidence with opener stock ), and wooden
tickets (unauthorized trades). In October 1996, the NASD accused Sterling Foster and 15
of its officers and brokers of making $51 million of illicit profits in nine months by using
manipulative trading, high pressure sales tactics, and wooden tickets. This is the largest
disciplinary case alleging stock manipulation ever brought by the NASD.
Equity Takedowns
Equity takedowns, or super block trades, are aggressive tactics taken by investment
banking firms in which the investment banker commits to buy stock at a discount from the
issuing company, and then seeks to redistribute these shares to clients before the market
 opens the next day. Until the stock is resold, the investment banking firm has its own
capital at risk.  These are used primarily in the seasoned offerings, known as spot
secondary offerings. As long as the markets remain robust, spot secondary offerings are
likely to grow in frequency.
      The approach is unlike a typical stock underwriting.  There is no road show or a
lengthy remarketing period during which underwriters seek to build a book of interest from
prospective purchasers.  This method could undercut the old-line investment banking
relationships the Wall Street firms have cultivated with corporate clients.  There are
significant advantages for the issuing corporation. The stock price is not hurt in the days
preceding the offering, as is common in underwritten deals.  Speed is another benefit.
There is no marketing process, and within a few hours the transaction is completed.
~ . 11  International Listings
The common stocks of many firms are traded not only on the major stock exchange in their
home country but also on an exchange in at least one foreign country.  For this reason
foreign investors no longer have to engage in foreign currency transactions when buying and
selling the firm's stock. It is also possible that foreign investors can escape certain taxes
and regulations to which they would be subject if the security were to be bought in the
firm's home country. There are two methods of trading such internationally listed foreign
securities in the United States. They involve the use of ordinary shares and American
Depositary Receipts (ADRs).
      The first way foreign securities may be traded in the United States is for the shares of
the finn to be traded directly just as the shares of a typical U. S. firm are. Canadian firms
generally are traded in this manner in the United States; at year-end 1996, none of the 55
Canadian firms that had their stock listed on the NYSE involved ADRs. Stocks traded in
this form are referred to as ordinary shares, or simply ordinaries.
      The second way foreign securities may be traded in the United States is with American
Depositary Receipts (ADRs). American Depositary Receipts are financial assets that are
issued by U. S. banks and represent indirect ownership of a certain number of shares of a
specific foreigu firm that are held on deposit in a bank in the firm's home country. The
advantage of ADRs over direct ownership is that the investor need not worry about the
delivery of the stock certificates or converting dividend payments from a foreign currency
into U.S. dollars. The depository bank automatically does the converting for the investor
and also forwards all financial reports from the firm.  The investor pays the bank a
relatively small fee for these services.  Typically non-Canadian firms use ADRs.  For