Helping Your Business With a Direct Public Offering

When most business owners think about going public, they immediately think of an initial public offering (IPO). However, today you have many other options, including a direct public offering (DPO). Depending on your business’ unique circumstances, a DPO may be a cost-effective alternative to the more traditional IPO. At Mangum & Associates, we assist entrepreneurs and companies with DPOs and other fundraising options, focusing on the specific needs and goals of each individual client.

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The decision to go public is exciting, but it also carries significant risk. A single regulatory misstep can have serious consequences — and you’ll have to navigate multiple regulatory processes and bodies, including the Securities and Exchange Commission (SEC), Depository Trust Company (DTC) and Financial Regulatory Industry Authority (FINRA). Because the future and stability of your venture are at stake, you should always consult with an experienced securities lawyer at every step of the process.

What Is a Direct Public Offering?

Selling registered securities through a direct public offering can channel much-needed capital into your business, which you can use to expand your infrastructure and operations, eliminate debt, and increase your liquidity. A DPO can also help diversify your shareholder base and reward long-time employees and investors for their dedication.

What Is the Difference Between a Direct Public Offering and an IPO?

When you make an initial public offering, you work with an underwriter who offers and sells your stock. An underwriter is typically an investment bank that assists companies who are preparing for an IPO and serves as a middleman between the company and investors. Most underwriting agreements require the underwriter or syndicate of underwriters to assume the risk of buying the initial public offering, and they then sell it to investors at the IPO price.

Underwriters typically also engage in a “roadshow,” where they present an IPO to potentially interested investors before the securities are available to the general public. This process helps gauge interest in the IPO, but also adds additional costs and time to the offering’s release.

In a DPO or direct listing, the company that is going public self-underwrites its public offering. While some companies opt for a direct public offering because they cannot find an underwriter, others simply are looking for a less expensive and more democratic method of public offering. Notable companies that opted for a DPO include Ben and Jerry’s Ice Cream and Spotify.

Today, most DPOs involve smaller businesses and non-profit organizations that are ready to go public.

Is a DPO Right for Your Venture?

Like any method of fundraising, a direct public offering has its advantages and disadvantages. Before you start the DPO or IPO process, you should carefully weigh these factors and understand how they may impact your business. Because this is a complicated and important analysis, you should consider consulting with an experienced securities lawyer from the initial outset of your fundraising project.

While every public offering is different, there are some common considerations in a direct public offering:

Advantages to a DPO

  • A DPO typically costs less than an IPO or reverse merger.
  • Shares can be sold to both accredited and non-accredited investors.
  • There is not a “lock-up” or waiting period with a DPO, and early investors and employees can sell their shares more quickly.
  • A DPO does not create new shares that dilute your company’s value, instead, you sell your existing shares publicly.
  • A direct public offering is frequently faster than an IPO.
  • Your business does not have to pay fees to an underwriter, potentially saving you millions of dollars.

Disadvantages to a DPO

  • Less price stability than an IPO, since your share prices will be market dependent.
  • The company is responsible for the offering and assumes all risk and are foregoing the safety net of an underwriter.
  • Without roadshows, you may have less access to desirable investors and may need to spend more time building up public name recognition and goodwill.

When comparing your offering options, it is important to understand that an IPO is not superior or inferior to a DPO. Rather, they offer distinct benefits depending on your business’ situation and goals. For example, some well-capitalized companies opt for DPO, since they don’t require an increase in name recognition from a roadshow and can save a significant amount of money through its streamlined process.

Importantly, there are other fundraising options, other than IPOs and DPOs, such as Regulation A+ and private placements that may suit your business’ goals. If you’re unsure how to proceed, it’s time to consult with a knowledgeable securities and fundraising professional. A securities lawyer can help you understand your full array of options, weigh their unique advantages and disadvantages, and build a plan that aligns with your strategic goals.

Direct Public Offering Process

Before you initiate a DPO, your venture will need to carefully assess its corporate structure, operations, and financial disclosures. Typically, companies consult with legal and accounting professionals who can help them fully prepare for going public. This audit may include an assessment of your company’s current securities structures and capitalization, articles, amendments, contracts, and past issuances.

Next, you and your DPO lawyers must submit a registration statement to the SEC and state securities agencies. This statement, which is typically on Form S-1, must include disclosures of all material information about the securities and your venture. Your Form S-1 must also include a prospectus. A prospectus outlines material information for prospective investors, including audited financial statements and dividend policies.

Then, the SEC will initiate its approval and comment process. Your DPO lawyer can guide you through this process and help you appropriately respond to the SEC’s comments and concerns. Upon completion, your S-1 will be effective — and you are almost ready to sell securities to the public.

Obtaining a Ticker Symbol From FINRA

However, simply registering with the SEC does not signal the end of the complete DPO process. While your venture has successfully satisfied federal regulatory requirements, it will still need to obtain a ticker symbol (typically from FINRA). This process also requires attention to detail and skill.

To get a ticker symbol, you typically must provide evidence that your business has:

  • Minimum of 25 investors that have held registered or non-affiliate shares for 12 months
  • Most of these investors paid cash for their shares
  • Non-affiliates hold at least 10% of your outstanding, unrestricted securities (i.e.; meets FINRA’s “float” requirement)
  • Obtained sponsorship from a designated market maker at a securities exchange

Your market maker will submit a Form 211 to FINRA, outlining essential information about your business and its offering. FINRA will then review your request and issue comments. Once you and your DPO lawyer have fully addressed the organization’s comments and satisfied its requirements, it should provide you with your ticker name.

Until you receive your ticker name, you simply cannot offer your shares on a public exchange like the New York Stock Exchange or NASDAQ.

Reverse Mergers vs. DPOs

Another method of going public is the reverse merger. In a typical reverse merger, a private company goes public by merging with an existing shell company. This shell company usually has no assets or liabilities, but assumes the private business and its operations during the merger.

While reverse mergers may sound appealing, they also carry significant risks. The SEC and FINRA have released multiple alerts about the hazards of reverse mergers, and it’s difficult to find legitimate public shell companies. In comparison, a DPO may be a less risky option. To learn more, contact Mangum & Associates today.

Consult With a DPO Lawyer

If your company is considering going public, the direct public offering lawyers at Mangum & Associates can help. Our nationwide team assists companies of all sizes and complexity with the securities and fundraising projects, including legal compliance audits, DPO preparation, and SEC filings. We pride ourselves on our results-driven approach to securities law and look forward to speaking with you.