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What Is Direct Public Offering (DPO)?

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by José Oramas · 6 min read
What Is Direct Public Offering (DPO)?
Photo: Depositphotos

The guide provides information on a Direct Public Offering (DPO) – a type of offering in which a company offers its securities directly to the public in order to raise capital.

Direct Public Offering (DPO), or direct listing, is a process in which a company buys a direct placement in the public market. Most private companies decided to go public using this method, selling their shares directly to the public on a stock exchange at market price.

How Does a DPO Work?

With a DPO, a company offers its securities directly to the public to raise capital. Unlike an Initial Public Offering (IPO), which usually has a much higher cost and requires the participation of third parties like underwriters and banks, a DPO eliminating the intermediaries as well as lowers the cost of capital of the offering.

A direct listing allows the issuer to set the terms of the public offering. In other words, it is up to the issuer to decide on the offering price, the number of stocks per investor, settlement date, and an offering period for purchasing stocks.

The process of conducting a Direct Public Offering is described below.

  • Hiring a Financial Advisor

First, most companies hire a financial advisor. It can be, for instance, an investment firm that undertakes the offering process. It also takes care of regulatory filings, investor sentiment, and share valuation. A prime example is the listing of Spotify Technology SA (NYSE: SPOT) that hired Goldman Sachs Group Inc (NYSE: GS), Morgan Stanley (NYSE: MS), and Allen & Co LLC to help them prepare the public presentation.

A company preparing for a DPO hires a financial advisor. The latter assists it in pricing its shares that are not held by executives or other affiliates.

  • Preparation

Once a company has its advisors, it has to gather its investors and educate them about its business and the share offering. As an issuer, a company has to prepare an offering memorandum, a document that gives specific and highly detailed information about the company and the securities. They can be common stocks, debt securities, preferred stocks, or others. This memorandum will help the company to attract external investors.

  • DPO Regulations

Next, the company needs to talk with the regulatory body of the country it is based in. Most private companies are based in the US, so they have to meet the regulatory laws of the Securities and Exchange Commission (SEC).

Some of these requirements include the offering memorandum, articles of incorporation (documents that establish the existence of a company in North America), quarterly financial reports, and other essential information.

  • SEC Exemptions

Most US-based companies are not required to be registered with the SEC as they qualify for certain exemptions. There are two exemptions, Rule 147 and Rule 504 (or regulation D). The first one is an intrastate exemption that allows companies to sell their securities publicly in the state they operate in. The second one exempts companies that raise $1 million or less in a 12 month period through the sales of securities.

Benefits of a Direct Public Offering for Companies

Many companies choose a direct listing as it has such benefits as:

  • Absence of high fees from third parties like underwriters and bankers and not selling stocks at a discount.
  • No lockup period, meaning shareholders can sell their shares right away and add liquidity to the market.
  • Banks only work as advisors, helping the company to prepare everything for the public launch.
  • The company’s own choice of the launch date, value offering, and stock limit per investor.

A DPO looks more lucrative than an IPO for many companies. Those using IPOs are trying to raise capital, while companies choosing DPOs are not necessarily looking to do so. They may want to benefit from increased liquidity and the freedom to sell their own stocks.

Opportunities DPOs Bring for Individual Investors

With a DPO, the stocks become available to all investors, whether they are individual or institutional. Retail investors often lose out to large investments with IPOs as stocks. Thus, DPOs have become an alternative for individuals looking to invest in large projects.

A DPO also allows a company to attract all kinds of investors, making the market open for everyone. Besides, a DPO helps retailers to learn about the company as much as institutions and other shareholders do.

DPO vs IPO

Both being the main ways companies raise funds, DPOs and IPOs have several key differences.

Firstly, with a direct listing, only the outstanding shares are sold with no underwriters involved. In contrast, an IPO creates new shares and involves several third parties.

Secondly, a direct offering has a set of financial advisors who undertake the public preparation process. Meanwhile, companies choosing an IPO hire underwriters or third parties that facilitate the IPO process and charge commissions for their work.

Thirdly, with an IPO, a company’s stocks are under a lockup period, which means that accredited investors, shareholders, and executives can not sell their shares right away.

Finally, a DPO allows executives and other shareholders to sell their shares at the market price, with no lockup period. With a DPO, the issuing company prepares its launch by settling the placement date, limits of stocks per investor, or the offering price. It does not have to hire underwriters for that.

Examples of DPO

There are numerous examples of companies going public via a DPO. One of the most famous cases is Spotify Technology S.A. (NYSE: SPOT). The music platform approached the law firm Latham & Watkinz and hired investment firms Morgan Stanley (NYSE: MS) and Goldman Sachs Group Inc. back in 2017.

Unlike it would be in an IPO, these firms acted as advisors, instead of undertaking the process. Their initial role was to assist Spotify in valuing its shares.

Another example is American software company Slack Technologies Inc (NYSE: WORK), which went public through a direct listing on the New York Stock Exchange (NYSE).

Although, a DPO is not a recent strategy. It has become a popular option for companies and individual investors thanks to elite companies such as Coinbase and Spotify. Back in 1984, Jerry Greenfield and Ben Cohen, who owned ice cream businesses, advertised their ownership stakes using local newspapers for $10.50. In a single year, Ben & Jerry’s Ice Cream raised $750,000.

Coinbase DPO

One of the biggest direct listings of 2021 is that of Coinbase. Instead of going with an IPO, the company decided to go public via a direct listing on the Nasdaq Stock Market.

On April 14, Coinbase became a publicly traded company with the tickers symbol COIN. This made Coinbase the first crypto exchange to be traded on the stock market. The event has caught the incredible attention of the media.

Conclusion

Many companies are now choosing DPOs as it offers wider options than a traditional IPO. This method has been increasing in popularity in recent years, helping small to midsize companies to eliminate the need for middlemen, high fees, and allow them to set their own terms for their public offering.

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FAQ

What is Direct Public Offering (DPO)?

Direct Public Offering (DPO), or direct listing, is a process in which a company buys a direct placement in the public market in order to raise capital. Most private companies decided to go public using this method, selling their shares directly to the public on a stock exchange at market price.

What are the stages of a DPO?

First, most companies hire a financial advisor. It can be, for instance, an investment firm that undertakes the offering process and takes care of regulatory filings, investor sentiment, and share valuation. 

Once a company has its advisors, it has to gather its investors and educate them about its business and the share offering. As an issuer, a company has to prepare an offering memorandum, a document that gives specific and highly detailed information about the company and the securities. They can be common stocks, debt securities, preferred stocks, or others. This memorandum will help the company to attract external investors.

Next, the company needs to talk with the regulatory body of the country it is based in. Most private companies are based in the US, so they have to meet the regulatory laws of the Securities and Exchange Commission (SEC). 

Some of these requirements include the offering memorandum, articles of incorporation (documents that establish the existence of a company in North America), quarterly financial reports, and other essential information.

Most US-based companies are not required to be registered with the SEC as they qualify for certain exemptions. There are two exemptions, Rule 147 and Rule 504 (or regulation D). The first one is an intrastate exemption that allows companies to sell their securities publicly in the state they operate in. The second one exempts companies that raise $1 million or less in a 12 month period through the sales of securities.

What is the difference between a DPO and an IPO?

Both being the main ways companies raise funds, DPOs and IPOs have several key differences. 

Firstly, with a direct listing, only the outstanding shares are sold with no underwriters involved. In contrast, an IPO creates new shares and involves several third parties.

Secondly, a direct offering has a set of financial advisors who undertake the public preparation process. Meanwhile, companies choosing an IPO hire underwriters or third parties that facilitate the IPO process and charge commissions for their work.

Thirdly, with an IPO, a company’s stocks are under a lockup period, which means that accredited investors, shareholders, and executives can not sell their shares right away.

Finally, a direct placement allows executives and other shareholders to sell their shares at the market price, with no lockup period. With a DPO, the issuing company prepares its launch by settling the placement date, limits of stocks per investor, or the offering price without having to hire underwriters.

What are the advantages of a DPO for companies?

A DPO enables a company to eliminate the intermediaries, which results in lower costs. Besides, raising money independently allows a firm to avoid the restrictions of bank and venture capital funding, as the terms of the offering are solely established by the issuing company. Moreover, to conduct a DPO, the firm doesn’t usually need to register with the SEC.

What are the most prominent examples of a DPO?

There are numerous examples of companies going public via a DPO. One of the most famous cases is Spotify Technology S.A. (NYSE: SPOT). The music platform approached the law firm Latham & Watkinz and hired investment firms Morgan Stanley (NYSE: MS) and Goldman Sachs Group Inc. back in 2017. 

Unlike it would be in an IPO, these firms acted as advisors, instead of undertaking the process. Their initial role was to assist Spotify in valuing its shares.

Another example is American software company Slack Technologies Inc (NYSE: WORK), which went public through a direct listing on the New York Stock Exchange (NYSE).

Although, a DPO is not a recent strategy. It has become a popular option for companies and individual investors thanks to elite companies such as Coinbase and Spotify. Back in 1984, Jerry Greenfield and Ben Cohen, who owned ice cream businesses, advertised their ownership stakes using local newspapers for $10.50. In a single year, Ben & Jerry’s Ice Cream raised $750,000.

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