And now, direct to the public....

• Author: MacQuarrie, Steve
• Position: Direct stock-purchase programs - Management Strategy

Offering a direct stock-purchase program may get investors to sit up and take notice, but don't forget to count in the cost of additional shareholders.

In 1993, the management of DQE, the holding company for Duquesne Light Co., faced several issues: a declining shareholder base, weak investor recognition outside the company's immediate vicinity and a lower stock price than its financial success warranted. To address these concerns, DQE took what was, at the time, a relatively uncommon step: It amended its dividend reinvestment plan to permit first-time investors to invest directly.

For the company, the results have been impressive. More than 6,000 new individuals, who now own a total of 350,000 shares, have invested through the plan. Plus, these investors have contributed more than $8.4 million in optional cash investments alone, proving the company's theory that a direct-purchase program would draw the kind of long-term, growth-oriented investors it sought. And, at a time when utilities have suffered significant blows to their stock prices, DQE's has held steady and even risen moderately during the past two years.

Share-purchase programs have abounded for years in the form of dividend reinvestment plans. More than 950 companies offer these plans, allowing investors to purchase stock, often commission-free, through reinvested dividends or optional cash purchases. Until now, however, first-time stock purchases have been left to brokers.

Opening up a company's direct investment program to nonshareholders, whether employees, customers or the general public, has always been possible in theory. But the arduous filing and approval process the Securities and Exchange Commission required could take anywhere from 12 months to two years to complete, so many companies passed on this option.

In December 1994, the SEC communicated a set of guidelines for selling stock directly to the public, dramatically shortening the time needed for approval. Now companies adopting open-availability programs that comply with the SEC's stated parameters can implement their programs much faster, typically in three to five weeks, a development that's paving the way for individual-investor participation. That's good news even for companies like DQE, which has already braved the individual filing process.

In most cases, the SEC assigned expiration dates to the open-availability programs of companies that had registered before December 1994. After the expiration date, companies had to refile with the commission. Under last December's blanket exemption, issuers whose plans comply with Rule 10b-6 specifications need only notify the SEC of their intention to use the class exemption, saving significantly on time and legal expenses. Also, in accordance with the exemption, companies may shift quarterly between open-market purchases and original-issue share purchases, in which investors buy shares directly from the company's reserve. This flexibility can be extremely valuable as companies' financing needs change.

More than 70 companies now have introduced open-availability programs, and industry consultants have estimated this number will grow to well over 100 in 1996. About a third of these companies currently offer programs that cover the entire United States. The rest are available only to customers or residents of the state or states in which the company operates.

These programs can benefit both the company and individual investors. When investors open an account with a brokerage firm, their shares typically are registered in the firm's "street name" rather than the investor's own name. Investors benefit because they don't have to keep track of stock certificates, they can sell shares with just a phone call and they receive consolidated statements, which simplify record keeping and tax filing.

But street-name ownership has its...