A direct public offering (DPO) or direct listing is a method by which a company can offer an investment opportunity directly to the public.

Description

A DPO is similar to an

initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investme ...

(IPO) in that

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

, such as

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

, are sold to investors. But unlike an IPO, a company uses a DPO to raise

capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...

directly and without a "firm underwriting" from an investment banking firm or

broker-dealer In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and ...

. A DPO may have a sponsoring

FINRA The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associati ...

broker, but the broker does not guarantee full

subscription The subscription business model is a business model in which a customer must pay a recurring price at regular intervals for access to a product or service. The model was pioneered by publishers of books and periodicals in the 17th century, a ...

of the offering. In a DPO, the broker merely assures compliance with all applicable

securities law Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies ...

s and assists with organizing the offering. Following compliance with federal and state securities laws, a company can sell its shares directly to anyone, even non-

accredited investor An accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor (if any), and the consequences of being classified as such, vary between countries. Generally, a ...

s, including customers, employees, suppliers, distributors, family, friends, and others.http://www.enotes.com/small-business-encyclopedia/direct-public-offerings Encyclopedia of Small Business Most DPOs do not require registration with the

Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

(SEC) because they qualify for an exemption from the federal registration requirements. The most commonly used exemptions are for intrastate offerings, offerings under $1 million (the Rule 504 exemption), and Regulation A. In such cases, state level registration is generally required. State level registration is usually less onerous and time-consuming than federal registration. Charitable organizations are also exempt from registration with the SEC and in most states. For offerings involving SEC filings (such as Regulation A) some law firms and other service providers offer to manage a DPO within twelve months, for less than $100,000. The process and time required for such an offering is similar to the process utilized by large companies to complete an IPO, except that many DPOs are marketed via

internet advertising Online advertising, also known as online marketing, Internet advertising, digital advertising or web advertising, is a form of marketing and advertising which uses the Internet to promote products and services to audiences and platform users. ...

and ads direct to consumers. Offerings that do not require federal registration or filings can be done more cheaply and quickly—costs can range from $15,000-$50,000, and it can take as little as one month to complete the process. Direct public offerings are primarily utilized by small to medium size companies and nonprofits who want to raise capital directly from their own community rather than from financial institutions like banks and venture capital firms. Direct public offerings are often viewed as a type of investment crowdfunding; but unlike the offerings made under crowdfunding exemptions (Title III of the federal

JOBS Act The Jumpstart Our Business Startups Act, or JOBS Act, is a law intended to encourage funding of small businesses in the United States by easing many of the country's securities regulations. It passed with bipartisan support, and was signed in ...

or similar state laws), DPOs are typically registered at the state level and undergo some degree of regulatory scrutiny. DPOs also generally offer more flexibility in marketing and soliciting investors for the offering than exempt crowdfunding offerings. Some direct public offerings are now being conducted on

crowdfunding Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by cro ...

platform sites. Many companies offer software and services to facilitate electronic DPOs on their websites.

Pros and cons

The advantages of a direct public offering include: broader access to investment capital, the ability to raise capital from the company's own community (including non-wealthy investors), the ability to utilize stock to complete acquisitions and

stock option In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified d ...

s to attract and retain employees, enhanced credibility and providing early investors with liquidity. The disadvantages of a direct public offering include: the company must raise its own capital without the assistance of professional financiers, the process has significant cost which may significantly reduce the effective capital raised, like any financing, it takes management time and attention from business operations, and there may be ongoing financial and legal reporting requirements.

Requirements

Any company or nonprofit following the applicable rules and regulations can conduct a direct public offering. There are no sales, profit, asset or other traditional requirements or qualifications. Companies interested in completing a direct public offering must have: #a complete set of internally generated

financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

s (which can usually be unaudited, though a few states require audited financials) #a disclosure statement (often called an offering memorandum or prospectus) providing all information potential investors need in order to make an investment decision #if applicable, state or federal regulatory approval. Subject to compliance with federal and state securities laws, a company may sell its shares to the public using a variety of methods. A company that conducts a DPO does not thereby become a publicly-traded company, nor does it typically become subject to SEC reporting requirements. However, the company may subsequently register its stock to trade on a public market or

over the counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...

. Some companies attempt to organize their financial statements,

audit An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...

and legal filings largely on their own, but most utilize direct public offering services offered by law firm or a

consulting firm A consulting firm or simply consultancy is a professional service firm that provides expertise and specialised labour for a fee, through the use of consultants. Consulting firms may have one employee or thousands; they may consult in a broad range ...

Examples

In April 2018, Swedish audio streaming company

Spotify Spotify (; ) is a proprietary Swedish audio streaming and media services provider founded on 23 April 2006 by Daniel Ek and Martin Lorentzon. It is one of the largest music streaming service providers, with over 456 million monthly active use ...

went public through a direct public offering, reaching a market value of US$26.5 billion. In June 2019, American business communication software company Slack had a direct public offering to reach a market value of US$19.5 billion. In September 2021, American analytics software company Amplitude had a direct public offering, reaching a market value of US$7.1 billion in its first day of trading.

References

External links