Roth Capital Partners Inc.’s investment in Portland, Ore.-based ReelChip.com Inc. is taking a new turn after RedChip’s August acquisition by Irvine-based FreeRealTime.com Inc.
Newport Beach-based Roth Capital plans to team with FreeRealTime and Jefferies & Co. of Los Angeles to develop a site for online public offerings and private placements called DigitalOffering.com. The move is designed to give online investors a shot at IPOs and other investments.
“The idea was born from our member base,” said Geoffrey Moore, FreeRealTime’s chairman and chief executive. “We had both been working on it during the course of the last year.”
Moore said he and other FreeRealTime executives learned that RedChip, which offers online information about companies with small market capitalizations, also had plans to do online offerings.
Interestingly, Byron Roth, chairman and chief executive of Roth Capital and now a FreeRealTime board member, is venturing into waters chartered by his former partner, Walter Cruttenden, who left to start E*Offering, now part of E*Trade Group Inc. Cruttenden left E*Offering after E*Trade moved the online offering subsidiary from Newport Beach to San Francisco. Now he runs an investment firm, Cruttenden Partners, out of the former E*Offering office in Newport Beach.
Roth Capital acquired a 55% stake in RedChip in August 1999. Roth Capital was one of RedChip’s earliest investors and was involved in each of the company’s three rounds of funding totaling $17.5 million. FreeRealTime, which provides online investor information, bought RedChip last month for $20 million.
FreeRealTime and Roth Capital got together to develop Digital Offering as a way for investment banks to sell their offerings online.
“We’ll set up an alliance that will have substantial deal flow,” Moore said.
Currently, Roth Capital and Jefferies are the only investment banks in the fold. But DigitalOffering is looking for five to 10 others to join to increase deal flow and “to have a vibrant community of investors for the offerings,” Moore said. He expects the site to debut before the end of the year.
FreeRealTime will be the largest shareholder in the company and Moore will be the chairman. Roth Capital and Jefferies along with the other investment firms will be shareholders in DigitalOffering.
Roth now owns 15% of FreeRealTime. The stake gives Roth entry to 1.3 million FreeRealTime members to try to sell its products and services.
“It is a way for us to get a bigger audience,” Roth said.
FreeRealTime, which offers members real-time stock quotes, hopes to benefit from RedChip’s research reports and stock analysis.
RedChip will keep its operations in Portland, but the new company’s headquarters will be in Irvine and run out of FreeRealTime’s office until the company finds new space in Orange County. The combined company has about 100 employees and it will have about $15 million in annual revenue, Roth said.
The alliance with RedChip has allowed Roth Capital to supplement its own research, Roth said.
“It would take a lot of capital to support that research on our own,” Roth said. “We can cover a lot more companies and it allows us to outsource a lot of the maintenance research.”
Like RedChip, Roth Capital provides investment banking services for small-cap companies, a segment that has seen a decline in investor interest, Roth said.
The firm has been trying to revive that interest, which is why it got involved with RedChip last year. Roth Capital competes with bigger Wall Street firms, which have hundreds of offices and thousands of brokers pushing mostly big-cap stocks.
“We are a small firm in the number of brokers. We can’t play with the big Wall Street firms when it comes to distribution,” Roth said.
Roth Capital has only two offices with retail operations, one at the Newport Beach headquarters and the other in its Los Angeles office.
Roth said he thinks the small-cap market is a niche his firm can exploit.
“We love that space,” Roth said. “We want to be the Goldman Sachs of the small-market-cap industry.”
The merger gives Roth Capital ammunition to grow in a sector that has taken some hits. The ability of investors to tap the small-cap market has suffered as a result of the consolidation of big Wall Street investment banks, a slowdown in the flow of funds to the smaller companies and new Nasdaq listing rules, Roth said.
The larger brokerage houses do not generate enough profits by selling the small-cap stocks and have moved to greener pastures with the big-cap stocks, he said.
This also has slowed down the amount of institutional investments that small companies get.
“The funds have migrated up and away from the space,” Roth said. “Small-cap stocks are getting orphaned.”
There are about 6,000 companies with market caps of less than $1 billion, and half of those companies do not get analyst coverage, Roth said.
Roth said there are some great investments in the small-cap sector, and Roth Capital has taken advantage of them. For the year ended June 30, Roth Capital’s private equity placements grew 47%, which is the best year Roth Capital has had since the 1995-1996 year. n
