What Is 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). 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.
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 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.
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.
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.
Importantly, there are other fundraising options, other than IPOs and DPOs, such as Regulation A+ and private placements. 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 can sell securities to the public.
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.