What is a direct public offering (DPO)?
A direct public offering (DPO) is a type of offering in which a company offers its securities directly to the public to raise capital. An issuing company using a DPO eliminates the middlemen – investment banks, brokers and underwriters – that are typical of initial public offerings (IPOs) and self-guarantees its securities.
Eliminating intermediaries from a public offering significantly reduces a DPO’s cost of capital. Therefore, a DPO is attractive to small businesses and businesses with an established and loyal customer base. A DPO is also known as a direct placement.
Key points to remember
- With a direct public offering (DPO), or direct placement, a company raises capital by offering its securities directly to the public.
- A DPO allows a company to cut out the middlemen that are normally part of such an offering and ultimately reduce costs.
- Raising funds independently allows a company to avoid the restrictions of bank financing and venture capital; the terms of the offer are solely established by the issuing company.
- Pre-DPO, the company must submit compliance documents to regulators in each state where it plans to offer securities; but unlike an IPO, the company generally does not need to register with the SEC.
How a direct public offering works
When a company issues securities through a direct public offering (DPO), it raises funds independently without the restrictions associated with bank financing and venture capital. The terms of the offer are solely up to the issuer who guides and adapts the process according to the best interests of the company. The issuer sets the offer price, the minimum investment per investor, the limit on the number of securities an investor can buy, the settlement date and the offer period during which investors can buy the securities and after which the offer will be closed. .
On December 22, 2020, the United States Securities and Exchange Commission announced that it would allow companies to raise capital through direct listings, paving the way for bypassing the traditional initial public offering (IPO) process. . In a direct listing, a company places its shares on the stock exchange without using investment banks to underwrite the transaction as an initial public offering. In addition to saving on fees, companies that go through the direct listing process can avoid typical IPO restrictions, including lock-up periods that prevent insiders from selling their shares for a set period of time.
What are Direct Ads?
In some cases, when there are a large number of shares to be issued or time is short, the issuing company may use the services of a commission broker to sell a portion of the shares to the broker’s clients or prospects in the possible. base.
Issuing companies can raise capital from the public without the stringent security measures and costs required by the SEC, as most of them are eligible for major federal securities exemptions.
Timeline of a DPO
The time needed to prepare a DPO is variable: it can take a few days or a few months. During the preparation phase, the company initiates an offering memorandum that describes the issuer and the type of security that will be sold. Securities that can be sold through a DPO include common stocks, preferred stocks, REITs, and debt securities, and more than one type of investment can be offered through the DPO. The company also decides on the medium that will be used to market the titles. Potential options include newspaper and magazine advertisements, social media platforms, public meetings with potential shareholders, and telemarketing campaigns, among others.
Before finally offering its securities to the public, the issuing company must prepare and file compliance documents with the securities regulatory authorities under the Blue Sky laws of each state where it intends to conduct a DPO. These documents would normally include the offering memorandum, articles of incorporation and up-to-date financial statements that show the health of the business. Receiving regulatory approval for a DPO application can take three weeks or several months depending on the state.
Most DPOs do not require issuers to register with the Securities Exchange Commission (SEC) as they are eligible for certain federal securities exemptions. For example, the Intrastate Exemption or Rule 147 excludes registration with the SEC as long as the company is incorporated in the state in which it offers securities and sells the securities only to residents of that state. .
How a DPO is officially announced
After receiving regulatory approval, the issuing company that operates a DPO uses a tombstone advertisement to officially announce its new offering to the public. The issuer opens the securities for sale to accredited and non-accredited investors or to investors already known to the issuer subject to any limitations by regulators. These investors can be acquaintances, customers, suppliers, distributors and employees of the company. The offer is closed when all the securities offered have been sold or when the closing date of the offer period has been clocked.
A DPO that has an expected minimum and maximum number of securities to sell will be canceled if interest or the number of orders received for the securities falls below the required minimum. In this case, all funds received will be refunded to investors. If the number of orders exceeds the maximum number of shares offered, investors would be served on a first-come basis or their shares would be allocated pro rata among all investors.
The United States Treasury has the most popular DPO system for its debt securities: TreasuryDirect is a 24-hour online system for individual investors to buy and sell Treasury securities such as notes, bonds, bills, savings bonds and Treasury Inflation Protected Securities (TIPS). ).
How a DPO is negotiated
Although an issuing company can raise funds from the company through a DPO, a platform for trading its securities will still not be available. Unlike an IPO which typically trades on the NYSE or Nasdaq after its offering, a DPO will not have such a trading platform but may choose to trade on the over-the-counter (OTC) markets. Like OTC securities, DPO securities may face illiquidity and risk if they are not registered and do not comply with Sarbanes-Oxley requirements.
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The number of large companies since 2018 opting for a direct listing, rather than an IPO; these are Spotify in April 2018, Slack in June 2019 and Coinbase in January 2021. However, Slack was purchased by Salesforce in July 2021 and is no longer publicly traded.
Prominent examples of DPD
One of the first notable DPDs was established in 1984 by Ben Cohen and Jerry Greenfield, two entrepreneurs who needed around $750,000 for their ice cream business. They advertised their stakes in local newspapers for $10.50 per share with 73,500 available, offering 17.5% of the company. Their loyal Vermont fanbase took advantage of the offer, and the company, Ben & Jerry’s Ice Cream, raised the necessary funds within months.
Popular music streaming service Spotify (SPOT) launched a direct public offering on April 3, 2018. Spotify chose to subscribe for its own shares through a direct listing, meaning there is no backing bank to support share prices by buying additional shares if necessary. At the same time, Spotify’s DPO was unique among such offerings: SPOT is also listed on the New York Stock Exchange. In previous cases where companies were listed on a stock exchange under a DPO, there were usually other special circumstances, such as previous bankruptcy filings, a move from one stock exchange to another, etc. Spotify was not subject to any of these conditions. As a company that was already enjoying massive popularity and cash flow positivity before its public offering, Spotify was able to bypass the typical publicity and fundraising efforts involved in an IPO.
On June 20, 2019, enterprise software company Slack debuted on the New York Stock Exchange via a direct listing; the stock opened at a price of $38.50, more than 48% above the benchmark price of $26 per share set by the NYSE. Slack was purchased by Salesforce in July 2021 and is no longer publicly traded.
