HEI Inc. posted its first profit in three years Monday, and investors seem increasingly confident that CEO Mark Thomas is delivering on his turnaround plan for the Victoria-based technology firm. Since late December, HEI's share price has surged almost 30 percent.

To 97 cents.

This makes HEI a penny stock, a phrase that conjures all sorts of unpleasant connotations. Further, HEI's shares are not listed on an exchange like Nasdaq, but quoted on the "pink sheets," where it can be difficult to separate the legitimate businesses from orchestrated pump-and-dump investment scams.

HEI is a real business. Last year, customers bought $37 million worth of the microelectronic devices and components that it designs and manufactures for the medical, industrial and computer markets. But since 2008 it's been confined it to the purgatory of the pink sheets, and it may be stuck there for a while because the ecosystem that used to finance, nurture and promote small Minnesota companies like HEI is mostly gone.

The impact of this change has been especially noticeable in the Twin Cities, once home to a robust investment community that underwrote, sold and promoted microcap -- less than $10 million -- stock offerings for young Minnesota companies.

These were homegrown companies financed largely by hometown investors, who were rounded up by firms such as John G. Kinnard, R.J. Steichen, Miller Johnson & Kuehn, Equity Securities and others.

At the risk of waxing too nostalgic, let's acknowledge upfront that these firms brought their share of dogs to market, including one company, Endotronics, that was an outright fraud.

But both Control Data Corp. and Medtronic came public through local investment firms, and right up until the mid-'90s it remained a popular way for new companies to raise money. Summit Securities took CNS, the company that introduced the Breathe Right nasal strip, public at $1.99 a share, raising $2.8 million. Fifteen years later Europe's largest drugmaker, GlaxoSmithKline, paid more than $36 a share to acquire CNS.

Computer Network Technology, another local start-up, came public at $3.375 a share in an IPO that raised less than $7 million; it was eventually sold for $235 million.

In each case, the relationship often began with a private placement or bridge financing before ultimately leading to an IPO. Then, the underwriter might assign an analyst to publish research on the company, and its stockbrokers -- who might even meet regularly with management at these companies -- would promote the stock with their retail clients.

"Stockbrokers played a much more crucial role with these small companies than we appreciated," said Patrick Donohue, a former investment banker who now runs Dealpen, a Minneapolis company that helps companies use technology and social media to tap potential investors. "They really performed an important marketing and distribution function."

These days, fewer people than ever rely on "tips" from their stockbroker. They trade themselves, or park their money in a mutual fund or wealth management account. Regulatory changes reduced profit that brokerages could make trading local over-the-counter stocks, and tightened restrictions on analyst research and compensation. The cost of being a public company also went up as a result of new disclosure and compliance requirements introduced in the wake of the Enron and Worldcom accounting scandals a decade ago.

HEI had less than $5 million in sales when it raised $8.4 million in a 1983 stock offering. Even after adjusting for inflation, those kinds of deals just don't get done anymore. Proto Labs, with $99 million in revenue, recently raised $70 million in its IPO. Bluestem, which owns the Fingerhut brand, was planning to raise $150 million before it pulled its offering.

The bigger-is-better trend didn't knock HEI onto the pink sheets, but it complicates Thomas' efforts to get anybody to notice that things have gotten better. HEI is, in effect, an orphan. No institutional investors own the company's stock, and local analysts no longer monitor its progress.

"It's really hard to get anyone's attention," said Thomas, who joined HEI about five years ago. "And that's tough for shareholders, many who've been with us since the '80s and '90s."

Thomas admits there are a few good things about not being listed on a national exchange. First, it saves the company about $500,000 a year. Second, management can focus on a longer-term horizon rather than worrying about meeting quarterly earnings targets.

Still, getting HEI listed on an exchange is a priority for Thomas. So, unlike many pink-sheet companies, HEI continues to file quarterly and annual financial reports with the Securities and Exchange Commission, which suggest a company on the mend. HEI's lender has raised its credit line, and the company has struck new equipment financing deals and is investing in new equipment to meet customer demand.

A good story, in other words. Now all Thomas needs is someone to tell it to.

ericw@startribune.com • 612-673-1736