What is direct public offering?
A DPO, otherwise known as a direct public offering, is a tool that permits investors to publicly buy a company’s shares directly, without the need for an intermediary or an underwriter. A company, with the aid of a DPO, can therefore avoid the many costs associated with going public that come with initial public offerings (IPOs). DPOs are like the ‘lite’ version of IPOs. The business that chooses such a route is exempted from the many reporting and registration requirements that come with the Securities and Exchange Commission (SEC) of India.
First becoming accessible to small businesses back in 1976, DPOs grew in popularity only in 1989 when their rules were simplified further. By the year 1992, the SEC had established its Small Business Initiatives Program. The goal of this initiative was to eliminate the barriers that limited the capability of small businesses to raise their own capital by selling their stock to investors. The advent of the internet further paved the way for DPOs to become normalized as companies now had the option to conveniently sell their stock via the Internet.
What is direct listing IPO and how is it different from standard IPO?
Now that we understand the DPO definition, here is its purpose. Ultimately, both DPOs and IPOs are a means that can be used by a company to sell its stock to the general public. This way the company aims to raise its capital so it can utilize that money for attaining its goals. DPOs are also sometimes referred to as direct listing IPOs. But how are they any different from a standard IPO?
The demanding structure, high costs, and reporting requirements of IPOs grew from an environment of discipline and reform in the wake of the Depression. Alternatively, DPOs came about at a time where the market was exuberantly expanding. Hence, they are a lower cost and convenient mode of listing one’s shares publicly.
Here are some of the core differences between a DPO and a full-fledged IPO.
– Unlike the stock listed in IPOs, DPO shares aren’t registered. This makes trading the stocks listed on direct public offerings more difficult.
– In a DPO, there are many ways in which raising a certain amount of capital is delimited.
– The overall cost borne by the company is lower for a DPO meaning that they are friendly for small businesses who struggle with the costs associated with a full-fledged IPO.
– IPOs very strictly adhere to the disclosures and requirements given by the SEC including their conformity to the terms of the Sarbanes-Oxley Act. They follow strict accounting methods and any other protocol detailed by the SEC. This protocol and rules do not apply to direct public offering
Advantages and disadvantages of direct public offering:
One of the core advantages of using a DPO instead of an IPO is that there is a dramatic reduction in the cost of publicly listing one’s shares. A commission of around 13% of the proceeds of the sale of one’s shares is normally charged by IPO underwriters. This percentage amount is typically 3% with a direct public offering. Another benefit of DPOs is that they can be carried out in a shorter period of time without having to disclose extensive amounts of confidential information.
A final advantage is that the investors who buy the stock from a DPO usually have a long-term orientation with the company. Hence. the company does not feel the pressure to deliver any remarkable short term results to gratify their new investors. This brings us to the limitations of a DPO. The main limitation is that there are limitations on the capital a company can raise within a 1 month period through a DPO. This is because the stock is typically sold at lower prices than it would in an IPO.
The stock that is sold through offerings that are exempt is typically not freely traded. There is no market price that has been established for the overall company or for their shares. Without this market price, the company might find it difficult to use their equity as loan collateral. Finally, those investors who buy into DPO stock are likely to demand a bigger share of ownership in the company so they can offset the limited liquidity of their position. The company may be pressured by investors to go public via an IPO so that investors can realize their profits.