Direct Public Offering (DPO)

A direct public offering (DPO) is a financial tool, and it is a type of offering in which a company offers its securities directly to the public to raise capital. A DPO is analogous to an initial public offering (IPO) therein securities, like stock or debt, are sold to investors, but unlike an IPO, a company or an organization uses a DPO to lift capital directly and without a “firm underwriting” from an investment banking firm or broker-dealer. An issuing company employing a DPO excludes investment banks, broker-dealers, and underwriters typical of initial public offerings (IPO) intermediaries and self-underwrites the securities.

DPOs first became available to small businesses in 1976 but only gained some popularity in 1989 when the rules were further simplified. The broker in a DPO merely maintains compliance with all relevant securities laws and helps in arranging the sale. Consequently, a DPO is appealing to small businesses with a proven and committed client base. A DPO is also known as direct placement (direct public offering).

Raising money independently allows a firm to avoid the restrictions of bank and capital funding; the terms of the offering are solely established by the issuing company. The foremost common kind of DPO is thought as a tiny low Corporate Offering Registration or SCOR. In compliance with federal and state securities laws, business or association can sell their shares to anyone, including customers, workers, suppliers, distributors, families, friends, and others.

DPOs also can be completed within a shorter time and without extensive disclosure of confidential information. When a company issues securities through a direct public offering (DPO), it raises funds independently without the restrictions of bank and venture capital funding. Most DPOs do not require registration with the Securities and Exchange Commission (SEC) because they qualify for an exemption from the federal registration requirements.

While DPOs may simplify the process of raising capital for the growth of small businesses, there is no guarantee that an offer will succeed. The terms of the offering are the sole responsibility of the purchaser, who directs and tailors the process according to the best interests of the client. DPOs are primarily utilized by small to medium size companies and nonprofits who want to lift capital directly from their own community instead of from financial institutions like banks and risk capital firms. The issuer sets the offering price, the minimum investment per investor, the limit on the quantity of securities that anyone investor should buy, the settlement date, and also the offering period within which investors can buy the securities and after which the offering are going to be closed.

Since the stock sold by a DPO goes to a small number of buyers who appear to have a long-term outlook, the company’s management also has less incentive to produce short-term performance. Small business owners, who find a DPO, need to know that hard work is involved. For some situations, where there are a large number of shares to be issued or time is of the essence, the issuing company may employ a commission broker’s services to sell a portion of the shares to clients or prospects of the broker on the best possible effort basis.

DPOs are often viewed as a kind of investment crowdfunding but unlike the offerings made under crowdfunding exemptions. DPOs are presumably to achieve success in companies that don’t seem to be overly hooked into their top management which have a sound business plan in situ. Securities which will be sold through a DPO include ordinary shares, stock, REITs, and debt securities, and quite one form of investment is offered through the DPO.

DPO investors are likely to demand a bigger share of ownership within the company to offset the dearth of liquidity in their position. The corporate also decides which medium are accustomed to market the securities. Companies that initiate DPOs can advertise their stock to customers on product packaging, through mailing lists, with posted messages in offices or other facilities, or by making the prospectus available on a website. Until actually selling its securities to the public, the issuing company must prepare and file compliance documents under the Blue Sky laws of each state where it plans to perform a DPO with the securities regulators.

Although DPOs can simplify the capital raising process, there is no guarantee that an offer will be successful. The advantages of a right away public offering (DPO) include – broader access to investment capital, the power to boost capital from the company’s own community (including non-wealthy investors), the flexibility to utilize stock to finish acquisitions and stock options to draw in and retain employees, enhanced credibility and providing early investors with liquidity. Depending on the state it may take two weeks or two months to obtain regulatory approval on a DPO application.

The disadvantages of an instantaneous public offering (DPO) include – the corporate must raise its own capital without the help of professional financiers, the method has a significant cost which can significantly reduce the effective capital raised, like several financing, it takes management time and a focus from business operations, and there could also be ongoing financial and legal reporting requirements. If the interest or amount of orders received for the securities falls below the minimum required, a DPO with an expected minimum and a maximum number of securities to be sold will be canceled. The earned funds will be refunded to the investors in this situation.

Finally, companies can improve their chances for a successful DPO by availing themselves of expert securities advice. When the number of orders exceeded the maximum number of shares available, the investors would be served on a first-come basis or all investors will have their shares prorated. Many companies prefer to handle their financial statements, audits, and legal reports solely on their own, but most use direct public service services offered by law firms or a consulting company.

 

Information Sources:

  1. investopedia.com
  2. referenceforbusiness.com
  3. inc.com
  4. wikipedia