GET READY FOR TEENYCAPS: WEB-BASED EXCHANGE OPENS FOR STOCKS, IPOS TOO SMALL TO HAVE SECONDARY MARKET

After a five-year struggle, former university professor Nimish Gandhi has opened Niphix Investments Inc., an Internet-based stock exchange aimed at taking startups public and providing their investors a secondary market to trade shares.

Whether Mr. Gandhi’s unique exchange for firms too small even to attract venture capital financing will play in Peoria isn’t the issue (Mr. Gandhi taught at Peoria’s Bradley University, and the first two issuers on his system are based in the Illinois city). The question is whether it will pay, both for Mr. Gandhi and the participants signing up, by attracting investors around the U.S.

There’s little doubt Niphix is filling a void in the marketplace, as venture capital firms investing on behalf of wealthy individuals and institutions swim upstream, avoiding seed capital deals for financing of later-stage firms.

In addition to the unsurprising home-town interest, the new exchange is attracting business from other corners of the country and also could get a big boost from a pending National Association of Securities Dealers regulation.

For example, Aztore Holdings Inc., a Tempe, Ariz., firm that specializes in turning around distressed small firms, plans to use Niphix to trade shares of two that have emerged from bankruptcy.

And the NASD is expected soon to issue a rule requiring firms quoted on the OTC Bulletin Board, the Nasdaq Stock Market’s market for small and thinly traded companies, to report their financials regularly to the Securities and Exchange Commission or other regulators. Only about half the 6,800 stocks on the Bulletin Board report today. Niphix could look very attractive to them, since it won’t be subject to the same requirements.

Niphix’s Internet-based system is fairly basic. Sellers post asking prices, and bidders come back with offers. It’s all done electronically and anonymously. Other firms also take small firms public via the World Wide Web. What differentiates Niphix is that it’s providing a secondary trading forum, Mr. Gandhi says.To p
articipate, investors must pony up an entrance fee of $100 and an annual fee of $25. Each trade, regardless of volume, costs $24 to $44, with the lower fees going to more frequent traders.

Companies going public via Niphix are charged $5,000 to post their registration document, which must be approved by the SEC, and another $4,800 once the shares are sold. Even adding on the cost of SEC registration, the price is a lot cheaper than listing on the Nasdaq Stock Exchange, which with underwriting, legal and listing fees typically runs in the hundreds of thousands.

sorting it out

Sounds simple enough, but Mr. Gandhi, a former marketing professor, knows he has a tough sell, particularly since much of Niphix’s promise lies in providing liquidity in these highly risky securities by attracting investors.

“There’s a tremendous need, and (Niphix) is going to find a lot of companies (interested in this),” says Oak Stevens, managing director of WGC Associates, a private equity group in Glenview, Ill. “The real challenge is, who’s the buyer and who’s on the back end of that transaction?”

Mr. Gandhi, 40, plans to screen out shell companies and other obvious undesirables, but otherwise investors will be on their own researching these fledgling stocks. Niphix does plan to mandate quarterly reporting by listed firms.

“The trouble is, I can’t figure out which 20% (of entrepreneurs) have good ideas and which 80% don’t,” says Mitchell Petersen, professor of finance at Northwestern University’s J.L. Kellogg Graduate School of Management. But Mr. Gandhi has at least two things going for him, observers say. One is the pent-up demand for capital by entrepreneurs turned away by banks and venture capitalists. The other is the power of the Internet to spread information about new companies.

on the way

Mr. Gandhi envisions Niphix as a kind of way station between private capital and the bigger public markets. “All we want to do is be an incubator system for these companies,” he says.

His first IPO will be Peoria-based Clark Engineers MW Inc., hardly a fledgling outfit with more than 100 employees and annual revenues over $9 million. The company, which opened an office in Phoenix a year ago, has financed its growth with debt and cash flow, but would like to grow faster. Establishing an office somewhere in the Southeast is the next goal, says Roger G. Keefauver, chairman and chief financial officer. The other IPO candidate is AC Gentrol, a power equipment manufacturer.

Four years ago, Clark explored an offering on the Nasdaq Stock Market, but deemed the $500,000 to $750,000 in underwriting and legal fees exorbitant. “Then this came up,” says Mr. Keefauver, who’s looking to raise $5 million through the sale of 500,000 shares, or about 40% of the firm. “I read an article in the local newspaper and thought, ‘God, this is a great idea.’ If it totally fails, the worst that can happen is we’ve lost $50,000 bucks. That’s it.”

For Mr. Gandhi, the consequences of failure are far larger. This project has consumed five years of his life, more than three of those spent securing SEC approval.