Direct Public Offering (DPO)

For a fast growing company with big capital needs, sometimes there’s nothing better than the public markets. The path to those riches has been the initial public offering (IPO), where a company sells shares for the first time to investors and those shares become publicly tradable on  the New York Stock exchange, NASDAQ or other stock exchange.

The problem is, IPOs have gotten very expensive. The average value of an IPO has shared from $10 million 20 years ago to about $140 million. Legal, accounting and advisory costs can easily climb into the millions of dollars, and that doesn’t take into account the cost of preparing quarterly reports from there on.

But there’s a little known alternative that is gaining momentum: the Direct Public Offering, or DPO. Think of it an IPO for the Do-It-Yourself crowd. While DPO is not an official term, it’s used to describe various ways of raising money directly from the public without officially “going public” on a stock exchange. DPOs are conducted under one of three established federal securities exemptions: Regulation A, Regulation D Rule 504, or Rule 147, the “intrastate exemption.”

A company doing a direct offering sells shares to the public, as in a traditional IPO. The main difference is that the company sells the shares directly. Instead of the shares going to a Wall Street underwriter’s well-heeled clients, everyday investors—including the company’s customers, friends, fans and supporters, can get in at the ground floor, and reap the same kind of returns (or losses, it must be said) that are typically reserved for insiders.  And, by cutting out the financial middleman, DPOs are accessible to companies that would not be able to afford a conventional IPO.

Resources:

Cutting Edge Capital helps companies conduct DPOs through its bootcamp programs, legal services and DPO marketplace. http://www.cuttingedgecapital.com/

Also see our coverage of DPOs, including:

Old School Crowdfunding: Meet The Direct Public Offering

How The JOBS Act Gets it Wrong—And DPOs Get it Right

Pros:

  • DPOs offer the benefits of an IPO without the cost.
  • Companies may reach out directly to their customers, supporters and the general public. There are no restrictions on advertising (as there are with various forms of investment crowdfunding), allowing for more creativity and direct engagement with potential investors.
  • Depending on the exemption used, companies can raise more money with a DPO than through Title III or intrastate crowdfunding.
  • DPOs have a solid track record: Companies such as Ben & Jerry’s have used it to raise funding. Ben & Jerry’s followed its successful DPO with an initial public offering.
  • By allowing individuals to invest in companies with whom they have an affinity or shared values, or whose products they like and admire, DPOs help to build a loyal following.

Cons:

  • DPOs aren’t called the Do-It-Yourself IPO for nothing! While less costly than a full-blown IPO, a significant amount of legal and accounting work is needed to prepare a prospectus and other filings.
  • DPO issuers are typically subject to Blue Sky laws and must file in each state where the offering will be conducted.
  • Liquidity may be an issue for investors. There may not be a way to trade shares on a secondary market, and when there is, volume may be scant. And not all companies will go on to an IPO or a sale.
  • There is no Wall Street underwriter conducting due diligence on the company. That leaves the pricing of your shares and other key decisions up to you.