Going Public

Alex Henderson
From computer technology to pharmaceuticals to fast food, publicly traded stock is the norm for a wide variety of industries. But there is one industry in which publicly traded stocks are the exception instead of the rule: adult entertainment.

Erotica providers are not absent from Wall Street altogether. Playboy Enterprises, New Frontier Media (based in Boulder, Colo.) and the Barcelona, Spain-based Private Media Group (which is the largest adult film powerhouse in Europe) are among the adult-oriented companies that have been publicly traded, but the vast majority of adult entertainment outfits have not.

XBIZ contacted some allies of the industry — including 1st Amendment attorney Lawrence G. Walters; accountant Joshua M. Kleinman, of the firm Solomon, Winnett & Co.; and investment adviser Martin P. O'Malley Jr. — to discuss the reasons why publicly traded adult companies are such a minority.

Los Angeles-based O'Malley, who heads his own company, Plan B Investments Inc., and is a member of the National Association of Security Dealers (NASD) as well as the Free Speech Coalition, told XBIZ: "People in the adult industry like marching to the beat of their own drum. The owners of the companies tend to be the sort of people who don't like having a boss; they don't like working for someone else. And when you become a publicly traded company, you have to report to someone else; you have to report to shareholders. You have to have certified audits; you have to have annual reports. You have to give public access to your books, and I just don't think that sits well with a lot of people in the adult entertainment industry."

Walters offered a similar description of adult-oriented entrepreneurs.

"For better or worse, the adult industry is made up of a bunch of entrepreneurs who are very free-thinking, individualistic and libertarian-oriented," he said. "They tend not to like a lot of structure, and none of that harmonizes well with being a publicly traded entity, which has to be very meticulously run and must adhere to a series of rules, disclosures, regulations and reports. All that kind of stuff is very antithetical to the typical adult industry entrepreneur, who tends to be more of a creative, fly-by-the-seat-of-the-pants person who is willing to take a lot of risks."

Los Angeles-based Kleinman, who has both mainstream and adult clients, cited a desire to "fly under the radar" as one of the main reasons why he thinks most adult businesses are in no hurry to become publicly traded.

"What would dissuade an adult company from going public is knowing that a lot more people are going to be looking closely at you," Kleinman said. "Based on what I have seen, people just want to keep a very low profile in the adult industry. There are some flamboyant and outspoken adult directors and talent out there, but they're promoters of the industry to begin with, and some of the more savvy business people who are really profiting from the industry are very behind-the-scenes. You don't know who they are, and they don't want you to know who they are. I would think that if you asked a lot of adult companies whether or not they wanted to go public, the majority of them would say, 'Absolutely not.'"

Kleinman estimated that only 1 percent of adult entertainment companies are publicly traded — maybe 4 percent or 5 percent at the most.

While Plan B's O'Malley said he understands the reasons why most adult-oriented businesses are not publicly traded, he also believes that more public trading of adult entertainment companies could be beneficial for the industry as a whole.

"More public trading of adult entertainment companies would draw more people into the adult sector," O'Malley said. "By purchasing stocks and becoming shareholders in adult companies, people are owners, albeit very small percentage owners, of adult entertainment companies — thus making adult entertainment more mainstream."

O'Malley has first-hand knowledge of how strong the stigma against adult entertainment can be. In the past, before he started Plan B Investments, the San Fernando Valley, Calif., resident worked for some investment firms he said prohibited him from pursuing clients in the adult entertainment business and from being actively involved.

But O'Malley's enthusiasm for the industry was strong, and starting Plan B gave him the freedom to pursue as many adult-oriented clients as he wanted.

Walters pointed to politics as a reason why having more publicly traded adult companies could be advantageous for the industry. American voters, Walters said, may be less likely to vote for politicians who stridently attack the adult entertainment industry if they have more of a financial stake in it.

"If you have a publicly traded company and the investors are doing well and they're receiving dividends, and the price of their shares is going up and up, they're going to want to protect that investment — and they're going to be much less likely to vote in ways that will harm that investment," Walters said. "That's true with any investor in any company. If you have somebody investing in an oil drilling company, you're going to be more likely to vote for the folks who favor more oil drilling. Right now, there aren't many publicly traded adult companies, but if public trading were to become more common in the adult industry, it could only help the industry from the standpoint of having more and more supporters who would have something to lose in the event of a government crackdown and having more people who were willing to stand up for the industry and protect their investment."

But Kleinman doesn't believe that being publicly traded would necessarily shield adult companies from political attacks.

"Being publicly traded certainly hasn't done anything to help the tobacco industry," he noted. "If the public gets into an uproar about something, they don't care if you're publicly traded. They don't care how much money you have. The tobacco industry got crushed because there was such a public uproar."

The Scrutiny of the S1
Kleinman is not a proponent of more adult companies becoming publicly traded since most adult entrepreneurs are much too privacy-loving to subject themselves to the intense scrutiny of an S1 audit, which is needed to become publicly traded. Kleinman stressed that if adult companies are seeking investors, there are plenty of private investors who are quite happy to invest if they think an adult-oriented entrepreneur has a smart business model.

"If an adult production company is seeking investors, they don't have to go to Wall Street," Kleinman said. "There are very good attorneys and accountants in Los Angeles — in the San Fernando Valley — who can guide you to untapped capital markets, which are generally wealthy individuals who will say, 'Sure, I have $100,000 or $200,000 lying around that I would love to invest with you.' And if an adult production company finds that type of private investor, they can keep things nice and quiet and tidy. Here in Southern California, there is a ton of money; there are plenty of people looking to invest in the adult industry, but they're looking to invest privately."