Direct Public Offering - Explained
What is a Direct Public Offering?
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Table of ContentsWhat is a Direct Public Offering?How does a Direct Public Offering Work? Timeline of a DPOProminent Examples of DPOsAcademic Research on Direct Public Offerings
What is a Direct Public Offering?
A direct public offering (DPO) is also called a direct listing or direct placement. It is a type of offering that is not backed by an intermediary such as an investment bank, rather, companies are allowed to offer their securities directly to the public. A DPO completely removes the need for a company to use a broker-dealer, an investment bank or underwriting firm before selling its securities. A direct public offering (DPO) is different from an initial public offering (IPO) which entails the use of underwriters, investment banks intermediaries for the issuance of stock by a company. With DPO, a company can issue or sell its stock directly to the public.
How does a Direct Public Offering Work?
Companies can raise capital directly through DPOs, this type of public offering allows companies to sell their securities directly to the public. Selling securities through direct public offerings save companies the cost of hiring underwriters, broker-dealers or investment banks to help sell their securities. In a DPO, the issuing company draws up terms of the offerings which is in the interest of the company. DPOS allow companies raise capital independently without the intervention of intermediaries. Part of the terms that are set by the issuing companies are the price of the securities, minimum and maximum securities that can be purchased by a single investor, the maturity date of the securities, among others.
Timeline of a DPO
There is a time frame for the preparation of DPO and there are specific securities that a company can sell through DPO. Examples of securities that can be issued through DPO are REITs, debt securities, common shares and preferred shares. The timeline for a direct public offering varies, it could take up to a few days or take up to months. Before a company offers it securities to the public, it needs time to make a memorandum that contains details if the securities that will be sold and the quantity. Also, the issuing company needs to file certain documents with security regulators before the offering of securities take place, which might also take some time. Once an issue company completes all filing processes with the securities regulators, it needs to wait for an approval before offering its securities to the public. After receiving approval, the company then announces the offering, in which securities are made available for accredited and non-accredited investors to purchase. Also, there is a closing date for every every, hence a DPO closes after all securities offered have been sold or it has reached its closing date. Registration with the Securities and Exchange Commission (SEC) is not a requirement that companies must meet before they carry out DPOs. registration is not needed due to the Rule 147 that exempts incorporated companies from registering with SEC before offering its securities publicly.
Prominent Examples of DPOs
There have been many DPOs that have been done by companies to raise capital independently. In the early centuries, businesses also used DPOS to raise capital for their business ventures, examples were Ben Cohen and Jerry Greenfield who had DPOs in 1984. With each share worth $10.50, Ben Cohen and Jerry Greenfield raised $750, 000 through the direct public offering that they held that year. The minimum number of shares that can be purchased by investors was 12 shares per person. A more recent occurrence of direct public offering happen in 2018 when spot offered its shares through a direct listing without any help from an underwriter or broker-dealer. As a prominent company which is also listed on the New York Stock Exchange, SPOT had a unique and successful DPO.
Academic Research on Direct Public Offerings