Direct public offering

A Direct Public Offering (DPO) is a method by which a business can offer stock directly to the public.

Description

A DPO is similar to an initial public offering (IPO) in that stock is sold to investors, but unlike an IPO, a company uses a DPO to raise capital directly and without a "firm underwriting" from an investment banking firm or broker-dealer. A DPO will generally have a sponsoring FINRA broker, but the broker does not guarantee full subscription of the offering. In a DPO, the broker merely assures compliance with all applicable Securities and Exchange Commission (SEC) rules that the offering must comply with and assists with organizing the offering. Following registration with the SEC and subject to compliance with state blue sky laws, a company can sell its shares directly to anyone, even non-accredited investors, including customers, employees, suppliers, distributors, family, friends and others.^[1]

Not all DPOs require registration with the SEC. Some offerings will qualify for an exemption from the federal registration requirements. The most commonly used exemptions are for intrastate offerings and offerings under $1 million (the Rule 504 exemption) and Regulation A. In such cases, state level registration is generally required. State level registration is usually less onerous and time consuming than federal registration.

Some law firms and other service providers offer to manage a DPO within twelve months, for less than $100,000. The process and time required to become public is similar to the process utilized by large companies to complete an IPO, except that many DPOs are marketed via internet advertising and ads direct to consumers.^[2]

Offerings that do not require federal registration can be done more cheaply and quickly - costs can range from $25,000-$50,000 and it can take as little as one month to complete the process.

Direct public offerings are primarily utilized by small to medium size companies who are unable to attract the interest of an investment banking firm to represent them in a traditional initial public offering. Investment bankers represent companies which can attract and support large financing from which they can earn a commission.

Direct public offerings are now being issued on crowdfunding platform sites. Many companies offer software and services to facilitate electronic DPOs on their websites.

Pros and cons

The advantages of a direct public offering include: broader access to investment capital, the ability to utilize stock to complete acquisitions and stock options to attract and retain employees, enhanced credibility and providing early investors with liquidity.

The disadvantages of a direct public offering include: the company must raise its own capital without the assistance of professional financiers, the process has significant cost which may significantly reduce the effective capital raised, like any financing, it takes management time and attention from business operations, and there are ongoing financial and legal reporting requirements.

Requirements

Any company following the applicable rules and regulations can go public by direct public offering. There are no sales, profit, asset or other traditional requirements or qualifications.

Companies interested in completing a direct public offering must have:

1. a complete set of internally generated financial statements
2. financial statements audited by a qualified accounting firm
3. a registration statement filed and declared effective by the Securities and Exchange Commission

After the Securities and Exchange Commission declares a registration statement effective and subject to compliance with state blue sky laws, a company may sell its shares to the public using a variety of methods. Upon completion of the public offering, the company may find a market maker to file an application for a trading symbol and stock listing.

Some companies attempt to organize their financial statements, audit and legal filings on their own, but many utilize direct public offering services offered by a consulting firm.

See also

• Alternative public offering
• Equity Crowdfunding

References

External links

• Direct public offering advantages, disadvantages and costs
• The Ups and Downs of Internet Direct Public Offerings
• Direct Public Offerings in the Encyclopedia of Small Business
• Sacks, Danielle. "Locavesting: Investing In Main Street Instead Of Wall Street". Fast Company Magazine Aug 3, 2011
• William K. Sjostrom, Jr., Going Public Through an Internet Direct Public Offering: A Sensible Alternative for Small Companies?
• What is a Direct Public Offering?

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