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 middlemen—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.
BREAKING DOWN Direct Public Offering (DPO)
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.
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.
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.
Issuing companies can raise capital from the public without the stringent security measures and costs required by the Securities Exchange Commission (SEC). Most DPOs do not require the issuers to register with the SEC because they qualify for certain federal securities exemption. 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.
After receiving 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.
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 (OTC) markets. Like OTC securities, DPO securities may face illiquidity and risk if they are not registered and do not conform to the requirements of Sarbanes-Oxley Act.
The United States Treasury has the most popular DPO system for its debt securities. TreasuryDirect is a 24-hour online system that is directly accessible to individual investors buying and selling Treasury securities such as notes, bonds, bills, savings bonds, and Treasury Inflation-Protected Securities (TIPS).
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 in April of 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 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.
Heading into 2019, there is speculation that popular rideshare service Lyft will engage in a similar DPO practice. While Lyft is significantly smaller than its competitor Uber, it nonetheless enjoys a valuation of $15 billion or so as of earlier in 2018. Uber is reportedly planning a public offering for 2019 as well, which may have something to do with Lyft's efforts to reach this goal.