No client is too small for Goldman Sachs Group Inc these days, even a company with no revenue that's owned by a hedge fund specializing in penny stocks.

In a move that surprised some observers, Goldman earlier this month emerged as the co-lead manager on an initial public offering for PetroAlgae

, a development-stage company that is trying to create oil from algae.

Florida-based PetroAlgae, which plans to raise up to $200 million in the offering, has lost $58 million over the past three years.

The renewable energy technology it is trying to develop is innovative, and other start-ups are trying to capitalize on it as well. But PetroAlgae is by no means a leader in the field. And unlike one of its rivals, it doesn't have dollars flowing its way from Exxon Mobil Corp , which is expecting to pump $600 million into the emerging industry.

Rather, PetroAlgae's main backer is an $800 million New York hedge fund, Laurus Capital Management, run by brothers Eugene and David Grin, who are best known for investing in private placements of cash-strapped micro-cap companies.

The IPO could help the brothers and their investors to monetize one of their funds' 94 percent equity stake in PetroAlgae.

In years past, this is the kind of deal that Goldman might have turned up its nose at, letting some second-tier bank take the job. But as the economy stumbles and financial reform laws squeeze banks' profits, Goldman appears more willing to underwrite smaller deals.

Goldman isn't the only bulge bracket firm leading the offering. Others include Citigroup and UBS .

But to some observers, underwriting such a small, speculative deal seems like an odd step for Goldman, given that the bank has long prided itself on being No. 1 among the white shoe firms.

It reminds me of the dot.com era again where Goldman was a player, but not the player, said Cornelius Hurley, a professor and director of Boston University's Morin Center for Banking and Financial Law. It does seem rather downmarket for them to be involved in this just out of the gate.

IPO STATS

Since the financial crisis, Wall Street banks have gone further down market as they look to collect fees and stay competitive in the league tables.

IPOs that Goldman has helped underwrite this year have raised an average of $225 million, compared with $685 million a decade ago, according to data complied by Thomson Reuters. Citi has seen a similar drop, to $220 million from $655 million, as have many other Wall Street banks.

The change in the IPO marketplace is a boon to companies like PetroAlgae, which has no revenue and three years of widening losses. Ten years ago, the company likely would have struggled to secure such a top-tier group of underwriters.

PICKING UP THE PIECES

Goldman is in the process of picking up the pieces after more than a year of negative publicity following the financial crisis.

The bank spent a large chunk of 2010 reassuring clients after it was charged with civil fraud by the U.S. Securities and Exchange Commission, stemming from its marketing and packaging of a subprime mortgage security.

Goldman settled the charges in July by agreeing to pay $550 million. People close to the bank say it is now trying to assess how much business it lost during the controversy.

Goldman and PetroAlgae declined to comment for this story.

Goldman's involvement in a company backed by the Grin brothers makes for an unusual pairing.

The Grins have been successful largely because of their strategy of investing in so-called PIPEs, or private investments in public equity.

PIPEs are a type of financing that has been popular with cash-starved companies. In a typical deal, a company raises cash by either selling shares at a discount or a bond that can convert into stock at a later date.

The main investors in PIPEs are hedge funds. The strategy has long drawn scrutiny from securities regulators worried about the potential for manipulating a company's share price.

Outside the world of penny stocks, the Grins got a degree of fame in New York City real estate a few years ago when their Laurus funds foreclosed on a $24 million loan and took title to a mansion owned by former Penthouse publisher Bob Guccione. The Upper East Side townhouse, one of the largest in Manhattan, was later purchased by hedge fund billionaire Phil Falcone, manager of Harbinger Capital Partners, for $49 million.

SOMETHING NEW, SOMETHING GREEN

PetroAlgae notified regulators of its plans to launch an IPO on August 11, but it has offered no timetable, meaning it could be months or even years before it goes to market. The company's IPO is unusual because its shares already trade on the OTC Bulletin Board, where razor-thin volumes cause massive swings in share prices.

The shares closed on Friday at $10 after opening the week at $19.99, with only 1,100 shares changing hands. The shares have traded in a wide range over the past four months, hitting a high of $26.75 on Aril 6 and a low of $6 on June 10.

Because PetroAlgae is already traded, it will be brought into broader public circulation through a complex reverse merger, which will amount to an IPO.

I'm not looking for this to be any kind of good offering, said David Menlow, president of IPOfinancial.com. He said it is highly unusual for a company like PetroAlgae to be embraced by investment banking heavyweights like Goldman.

Something new, something green, doesn't always translate in the investment community, he said.

Indeed, members of PetroAlgae's leadership team created TyraTech, a company that makes environmentally friendly insecticides and which went public in 2007. The shares began trading at 505 pence on the Alternative Investment Market of the London Stock Exchange, but they now trade at just 22.50 pence.

A FOOTHOLD

To be sure, Goldman and other investment banks in the heyday of the dot.com boom were quick to take to market any company that had a website and a semblance of a business plan. Remember eToys?

And in jumping on the PetroAlgae deal, analysts in the cleantech industry say Goldman could merely be trying to secure a foothold in the sector and put down a marker for bigger and better alternative energy deals to come.

Should the PetroAlgae IPO succeed, Goldman could be well positioned to take part in others, said Ian Horowitz, an analyst with boutique investment bank Rafferty Capital Markets.

If Goldman goes in and gets it done, maybe they see a large pipeline of next-generation biotechnology centers coming through, Horowitz said. These banks see this could be a good opportunity to do more than just this one.

A day after PetroAlgae said it would launch its IPO, Gevo Inc, an Englewood, Colorado-based bio-fuel developer, said it would go public in a $150 million offering. Goldman and UBS are among the underwriters of the Gevo IPO.

The excitement over fuel made from algae got a boost a year ago when Exxon announced it would make a $600 million investment to help develop the technology. Exxon signed on for a partnership with Synthetic Genomics, a PetroAlgae rival.

For its part, PetroAlgae last November announced it had signed a memorandum of understanding to enter an agreement to license its proprietary technology to Indian Oil Corp, India's largest company by sales.

But PetroAlgae did not get any of the ExxonMobil money -- and continues to scrape by.

In an interview with Reuters a year ago, director and chairman John Scott said the company would see initial revenues by the end of 2009. He said a consortium of Chinese interests would pay for the company's first license agreement.

Those revenues never arrived.

(Reporting by Steve Eder; editing by John Wallace)