Direct Public Offering
Going public is a big step for a company to make. It puts control of the company into the hands of investors, raises capital, and radically alters management requirements, making it a serious milestone on a company’s history. Contrary to popular belief, the IPO, or initial public offering, is not the only way a company can complete the process of going public. Other options include the DPO, or direct public offering, and the reverse merger, via which a private entity purchases a public one to complete the process “backwards”. Today, we’ll focus on the DPO, an interesting and useful method that smaller entities can use to go public.
What is a DPO?
A DPO is a direct public offering. Unlike the IPO, a DPO is used to raise capital directly, without the aid of a broker-dealer or investment bank. This is accomplished by selling stock directly to consumers, who can be employees, third parties, customers, family, friends, or just about anyone else. This allows the company to rack up a reasonable amount of capital while going public and avoiding the fees associated with commissions to banks or brokers.
Why Would a Company Choose to Use a DPO?
Smaller companies might incline to a DPO rather than an IPO because of the lower cost of execution, for one. Third parties, such as law firms, sometimes manage DPOs for less than $100,00, which is significantly less than the fee an investment bank would charge to handle an IPO. Another reason to choose the DPO is an inability to find an interested investment firm. Large banks are typically only interested in IPOs that net them a huge commission. If your company is small, they obviously won’t profit as well as they would if it were large, so they may not be interested. In this case, a DPO might be necessary more than preferable.
What Are Some of the Benefits of a DPO?
The benefits of a DPO are many, but the primary pros include the immediate access to additional capital via stock sales, the ability to offer employees stock options for better attraction and retention of executive-level employees, and the ability to acquire other companies or exert corporate influence over other companies in a way that is only possible for a publicly traded entity. These are all great reasons for a company to consider a DPO, and are probably the most common.
The DPO doesn’t come without penalties, though. Companies that complete a direct public offering have to advertise their securities independently, meaning they’ll have to spend time and money on marketing efforts if the offering is to generate any reasonable capital. For firms with powerful marketing tactics and a proven advertisement record, though, this doesn’t pose much of a problem, and might actually make the DPO relatively easy to manage.
The DPO is a very real, very relevant option for any small to medium sized business looking to go public – look into it if it seems to suit your needs.