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Direct Public Offering (Explained: All You Need To Know)

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What is a Direct Public Offering?

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What Is Direct Public Offering

A direct public offering, or DPO, refers to the sale of securities directly to the general public by a company instead of going through a financial intermediary.

In other words, when a company issues securities directly to the public, it will directly interact with the buyers or investors and skip the investment bankers, broker-dealers, and other intermediaries.

The main reason why the direct public offering is enticing is that it allows companies to raise capital without having to pay commissions, fees, and other compensation to those underwriting the transaction.

Another important benefit of direct public offering is that the issuer does not have to deal with the restrictions and conditions underwriters impose when underwriting a transaction.

As a result, the company will have the ability to issue shares by setting the terms and conditions that will work best for the organization.

Keep reading as I will further break down the meaning of a direct public offering and tell you how it works.

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Why Is A Direct Public Offering Important

A direct public offering is an important method for companies of all sizes to raise capital without having to deal with middlemen.

This is generally an attractive way for smaller companies to raise capital without having to incur significant costs in the process.

When companies sell directly to investors, they have the freedom to determine the terms and conditions of the offering.

For example, a company may choose to set a minimum investment requirement, set the offering price, determine how many shares each investor can purchase, and when the offering begins and ends.

Typically, companies that sell their shares through broker-dealers or investment banking firms will have to accept many restrictions imposed by such intermediaries.

However, companies that have a loyal fan base, enjoy a great reputation, or have close relationships with their clients may find it better to raise capital through a direct offering than to go through an intermediary.

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How Does Direct Public Offering Work

To initiate a direct public offering, companies are required to comply with certain regulatory requirements.

In the United States, in December 2020, the US Securities and Exchange Commission announced that it will authorize companies to raise capital through direct losing.

This means that companies are given the option to raise capital without having to hire an investment banking firm to offer the shares to the public.

Companies can directly offer different types of securities to the public, such as common shares, preferred shares, debt securities, and others.

The first step is for the company to prepare an offering memorandum where they will provide details about the offering and how it will be advertised.

The second step is to ensure that the company files the necessary documentation with the relevant securities regulators in every state where securities will be sold. 

Typically, the company will have to provide various documents such as its articles of incorporation, financial statements, copy of the offering memorandum, and others.

Once the regulators approve the company’s direct public offering request, the company will then be able to sell the shares directly to investors in the general public.

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Direct Public Offering Sales Process

Once a company has obtained the necessary approvals from the securities regulators to offer its shares to the general public, the offering sale process begins.

The first step is for the company to advertise its direct public offering so the public becomes aware of the offering.

Traditionally, tombstone ads were used to advertise the sale although today companies can advertise in different mediums.

To the extent the regulators have not imposed any restrictions on the sale of the shares, both accredited and non-accredited investors can purchase shares from the company.

Also, the direct public offering will remain open for the intended duration.

In some cases, the offering remains open until all the shares are sold and in other cases the offering closes when the closing date arrives.

Since the company is selling its shares directly to investors, it has the ability to establish the terms and conditions of the sale.

For instance, the company can set a requirement that a minimum number of shares must be sold for the transaction to be consumed in full (otherwise, the investors will get their investment refunded).

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Direct Public Offering Market

Investors buying securities directly from issuers should take into account the liquidity for the securities.

Since the company is selling directly to the investor, the transaction is not facilitated through a stock exchange.

In other words, the shares do not trade on exchanges like the New York Stock Exchange or Nasdaq but rather on over-the-counter markets.

An over-the-counter market refers to shares that are traded through broker-dealers as opposed to a centralized stock exchange.

Broker-dealers can trade all kinds of securities like stocks, bonds, derivatives, commodities, and so on.

In this context, investors should be mindful that there may not be a liquid market for their securities in case they wish to sell them in the future.

Also, over-the-counter securities may expose investors to more risk since most direct public offerings are not required to be registered with the SEC.

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Direct Public Offering FAQ

What are some examples of direct public offerings?

There are many examples of direct public offerings that can be cited.

One notable example of a direct public offering is that of Spotify announced on April 3, 2018.

Although Spotify was listed on the New York Stock Exchange, it was able to raise capital through a direct public offering by leveraging its good reputation and popularity.

What are the pros and cons of direct public offerings?

The main benefits of the direct public offering are that the company can raise capital by selling securities to individuals and companies within its inner-circle, allow employees to participate in the company’s growth, avoid paying financial intermediaries and provide some liquidity to early investors who may want to exit.

On the other hand, direct public offerings require that company managers spend a significant amount of time to ensure the process is handled properly, prepare its own offering memorandum, and ensure that it observes ongoing reporting requirements, if any.

Will a DPO render a company a publicly-traded company?

It’s important to note that direct public offerings do not render a company as a publicly-traded company.

As a result, companies selling securities via DPO will not have to comply with the same reporting requirements as publicly-traded companies.

The benefit is that the company can sell shares to the general public without necessarily having to register the securities with the SEC.

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Business and law blog

Takeaways 

So there you have it folks!

What does a direct public offering mean?

In a nutshell, a direct public offering is an alternative way for companies to raise capital instead of going through an initial public offering process.

A direct public offering consists of the sale of shares to the general public without subsequently listing the shares in a centralized stock exchange.

Small and medium-sized companies tend to consider direct public offerings as they can sell shares to the general public, reduce their cost of capital, and potentially not have to register their shares with the SEC.

On the flip side, companies offering securities directly to investors should make sure they handle the process correctly to avoid any legal or financial liability.

Now that you know what a direct public offering means and how it works, good luck with your research!

Blue Sky laws
Tombstone ad 
Initial Public Offering
Direct listing 
Accredited investor 
Broker-dealer 
Alternative Public Offering
Equity crowdfunding 
Bought deal
Author

Amir K.
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and I love it!). I'm also an expert SEO and content marketer. On this blog, I share my experience, knowledge, and provide you with golden nuggets of useful information. Enjoy! Feel free to connect with me on LinkedIn.

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