Direct Public Offerings (DPOs) are shares of stock in a company, usually a start-up, offered to potential investors so as to raise funds for the company. However, unlike the conventional way of selling stocks to a broker who then sells the stock to any potential buyer, with direct public offerings the company cuts out the middleman and directly sells the shares to potential investors.
DPOs are registered security offerings with the state security administrators. However, there is no underwriter for selling the stock. The company will sell shares of stock directly, usually to groups that the company has a financial relationship with, such as customers, employees, suppliers, distributors or anyone else the company would have as its trusting and loyal supporters.
There are several advantages to a DPO that can make it more appealing to a company rather than the conventional manner of selling shares of stock, raising money through venture capitalists, or taking out loans:
- DPOs are cheaper for the company than having an underwriter sell stocks to the public. This is why it is sometimes a preferred method for start-up companies to raise funding.
- Unlike loans, any funds that are raised do not have to be paid back because individuals are actually buying part of the company, not just lending money to the company.
- Usually you will have to give up a smaller amount of equity for the same amount of money than required by venture capitalists. This is because valuations in the stock market are usually higher than in non-public transactions.
While DPOs can be helpful for start-up businesses, before you fully decide on this method instead of other more conventional methods you should be aware of the risks you will be taking:
- It is no easy task going through the process of setting up DPOs. There is a lot hard work involved in getting a document through state regulators or the SEC.
- Remember that with a DPO your company is solely in charge of making sure your stock gets sold. There is not going to be any broker helping you along with this process. This includes putting a price on your stock, so you will have to do a good job evaluating your company to determine its worth, and then advertise the sale of your company¿s stock to actually get it to sell for what you think is a fair price.
First off, you will want to find an accountant who can help you with the process. In addition, you will most likely need a business attorney who has experience in securities law. Your attorney can help you understand the securities laws that apply to you, as well as assist you in getting documents through the state security administrator’s office and the SEC.