Direct Public Offering (DPO)

What Is a Direct Public Offering (DPO)?

A direct public offering (DPO) is a type of offering in which a company offers its securities directly to the public to raise capital. An issuing company using a DPO eliminates the intermediaries — investment banks, broker-dealers, and underwriters — that are typical in initial public offerings (IPO), and self-underwrites its securities.

Cutting out the intermediaries from a public offering substantially lowers the cost of capital of a DPO. Therefore, a DPO is attractive to small companies and companies with an established and loyal client base. A DPO is also known as direct placement.

How a Direct Public Offering Works

When a firm issues securities through a direct public offering (DPO), it raises money independently without the restrictions associated with bank and venture capital financing. The terms of the offering are solely up to the issuer who guides and tailors the process according to the company's best interests. The issuer sets the offering price, the minimum investment per investor, the limit on the number of securities that any one investor can buy, the settlement date, and the offering period within which investors can purchase the securities and after which the offering will be closed.

Important

On December 22, 2020, the U.S. Securities and Exchange Commission announced that it will allow companies to raise capital through direct listings, paving the way for circumvention of the traditional initial public offering (IPO) process. In a direct listing, a company floats its shares on an exchange without hiring investment banks to underwrite the transaction as an initial public offering. In addition to saving on fees, companies that follow the direct listing process may avoid the usual IPO restrictions, including lockup periods that prevent insiders from selling their shares for a defined period of time.

In some cases, where there are a large number of shares to be issued or time is of the essence, the issuing company may employ the services of a commission broker to sell a portion of the shares to the broker’s clients or prospects on a best efforts basis.

Issuing companies can raise capital from the public without the stringent security measures and costs required by the SEC since most of them qualify for key federal securities exemptions.

Timeline of a DPO

The amount of time necessary to prepare a DPO is variable: it can take a few days or a few months. During the preparation stage, the company initiates an offering memorandum which describes the issuer and the type of security that will be sold. Securities that can be sold through a DPO include common shares, preferred shares, REITs, and debt securities, and more than one type of investment can be offered through the DPO. The company also decides which medium will be used to market the securities. Potential options include newspaper and magazine ads, social media platforms, public meetings with prospective shareholders, and telemarketing campaigns, among others.

Before finally offering its securities to the public, the issuing company has to prepare and file compliance documents to the securities regulators under the Blue Sky Laws of each state where it intends on conducting a DPO. These documents would normally include the offering memorandum, articles of incorporation, and up-to-date financial statements that show the health of the company. Receiving regulatory approval on a DPO application could take two weeks or two months depending on the state.

Most DPOs do not require the issuers to register with the Securities Exchange Commission (SEC) because they qualify for certain federal securities exemptions. For example, the intrastate exemption or Rule 147 excludes registration with the SEC as long as the company is incorporated in the state where it is offering securities and only selling the securities to residents of that state.

How a DPO Is Formally Announced

After receiving regulatory approval, the issuing company running a DPO uses a tombstone ad to formally announce its new offering to the public. The issuer opens up the securities for sale to accredited and non-accredited investors or investors that the issuer already knows subject to any limitations by the regulators. These investors may include acquaintances, clients, suppliers, distributors, and employees of the firm. The offering closes when all securities offered have been sold or when the closing date for the offering period has been clocked.

A DPO that has an intended minimum and maximum number of securities to be sold will be canceled if the interest or number of orders received for the securities falls below the minimum required. In this case, all funds received will be refunded to the investors. If the number of orders exceeds the maximum number of shares offered, the investors would be served on a first-come basis or have their shares prorated among all investors.

The United States Treasury has the most popular DPO system for its debt securities: TreasuryDirect is a 24-hour online system for individual investors buying and selling Treasury securities such as notes, bonds, bills, savings bonds, and Treasury Inflation-Protected Securities (TIPS).

How a DPO Is Traded

Although an issuing company can raise funds from the company through a DPO, a trading exchange platform for its securities will still not be available. Unlike an IPO that usually trades on the NYSE or Nasdaq after its offering, a DPO will not have such a trading platform but can opt to trade in the over-the-counter markets (OTC). Like OTC securities, DPO securities may face illiquidity and risk if they are not registered and do not conform to the requirements of the Sarbanes-Oxley Act.

The number of major companies in the last 18 months to opt for a direct listing, rather than an IPO; they are Spotify in April 2018 and Slack in June 2019.

Prominent Examples of DPOs

One of the earliest notable DPOs was in 1984 by Ben Cohen and Jerry Greenfield, two entrepreneurs who needed funds for their ice cream business. They advertised their ownership stakes through local newspapers for $10.50 per share with a minimum number of 12 shares per investor. Their loyal fan base in Vermont took advantage of the offer and the company, Ben & Jerry’s Ice Cream, raised $750,000 within the year.

Popular music streaming service Spotify (SPOT) launched a direct public offering on April 3, 2018. Spotify opted to underwrite its own shares via a direct listing, meaning that there is no supporting bank to buttress share prices by purchasing any additional stock if necessary. At the same time, Spotify's DPO was unique among offerings of this type: SPOT is also listed on the New York Stock Exchange. In previous cases in which companies have listed on exchanges as part of a DPO, there have typically been other special circumstances, such as previous bankruptcy filings, a shift from one exchange to another, and so on. Spotify was not subject to any of these conditions. As a company which already enjoyed massive popularity and cash flow positivity prior to its public offering, Spotify was able to bypass the typical publicity and fundraising efforts involved in an IPO.

On June 20, 2019, enterprise software company Slack (NYSE: WORK) debuted on the New York Stock Exchange via a direct listing; the stock opened at a share price of $38.50, more than 48% above the $26 per share reference price set by the NYSE.