What is a Direct Public Offering (DPO)?
A Direct Public Offering (DPO), also recognized as a direct listing, represents a strategic approach where a company independently offers its securities to the public to raise capital. By sidestepping traditional intermediaries such as investment banks, broker-dealers, and underwriters, a company can minimize its cost of capital through a DPO. This makes the DPO particularly appealing to smaller companies and those with a loyal customer base.
Key Takeaways
- Direct Funding: A DPO allows companies to directly raise funds from the public, bypassing intermediaries and thereby reducing overall costs.
- Independence: Companies benefit from less restrictive terms compared to bank or venture capital funding, as the issuer sets all the terms of the offering.
- Regulatory Flexibility: Unlike with an IPO, a company doesn’t typically need to register with the SEC, provided they meet certain criteria and state regulations.
A Closer Look at How a Direct Public Offering Works
Issuing securities through a DPO enables a company to raise capital independently, free from the restrictions linked with traditional bank and venture capital funding. The issuing company sets all terms of the offering – from price per share and minimum investment requirements to the offering period and settlement date.
The regulatory update on Dec. 22, 2020, by the U.S. Securities and Exchange Commission (SEC) highlighted direct listings as an alternative to the traditional IPO process. Companies that choose this route may also bypass lockup periods, which often restrict insiders from selling shares immediately post-offering.
When urgency or high-volume shares are at play, companies may opt to engage commission brokers to sell shares on a best-efforts basis to their clients.
Timeline and Preparation for a DPO
Preparation time for a DPO can range from few days to several months. Key action items during this phase include preparing an offering memorandum and deciding on the delivery medium for marketing the securities, which could span newspaper ads, social media, and public meetings.
Before making an offering, the company needs to adhere to Blue Sky Laws by filing all necessary compliance documents with state regulators where the securities will be marketed. Regulatory approval times can also vary, spanning anywhere from three weeks to several months.
While often exempt from SEC registration, DPOs must still comply with federal securities exemptions like Rule 147, which owns jurisdiction over intrastate offerings.
Formally Announcing a DPO
Post regulatory approval, DPOs are formally announced using a tombstone ad, inviting accredited and non-accredited investors, including clients, employees, and acquaintances, to participate. The securities are sold on a first-come basis or prorated among interested investors if they exceed the max share limit.
The U.S. Treasury exemplifies an effective DPO system allowing individual investors to buy and sell a diverse range of treasury securities through its TreasuryDirect platform.
Trading After a DPO
Once funds are raised, a DPO-related securities exchange platform is not always readily available. Unlike an IPO, DPO securities are typically traded in over-the-counter (OTC) markets with a possible inherent liquidity and risk issue due to the strict adherence requisites of regulations like the Sarbanes-Oxley Act.
Noteworthy Examples of Recent DPOs
Spotify
In April 2018, music streaming giant Spotify took the lead by launching its direct public offering with no backing investment bank to stabilize share prices. Despite a novel move, Spotify was listed on the NYSE, showcasing that DPOs could successfully transition into the tradable, fully compliant company listings.
Slack
Similarly, Slack ended its path with the IPO process in June 2019 and made its NYSE debut through a direct listing. Opening at $38.50, considerably above the $26 per share reference price, Slack demonstrated exceptional entry and existed list trading compliance before being acquired by Salesforce in July 2021.
Ben & Jerry’s
Dating as far back as 1984, Ben & Jerry’s raised $750,000 via a DPO by inviting local residents to purchase shares at $10.50 each. Their steadfast, loyal customers from Vermont ensured the offering quickly met its target, embedding the company’s roots deeply within its customer base.
Related Terms: Initial Public Offering, IPO, Venture Capital, Blue Sky Laws, SEC.
References
- U.S. Securities and Exchange Commission. “What Are the Differences in an IPO, a SPAC, and a Direct Listing?”
- U.S. Securities and Exchange Commission. “Release No. 34-90768”.
- U.S. Securities and Exchange Commission. “Overview of Capital-Raising Exemptions*”.
- Cutting Edge Capital. “How Long Does a DPO Take?”
- U.S. Securities and Exchange Commission. “Real Estate Investment Trusts (REITs)”.
- U.S. Securities and Exchange Commission. “What Different Types of Securities are Issued to Startup Investors?”
- U.S. Securities and Exchange Commission. “Blue Sky Laws”.
- U.S. Securities and Exchange Commission. “Intrastate Offerings”.
- TreasuryDirect. “Treasury Securities & Programs”.
- Coinbase. “Coinbase Announces Proposed Direct Listing”.
- Slack. “Slack Announces Update Regarding Conversion of Shares of Class B Common Stock to Shares of Class A Common Stock”.
- Harvard Law School Forum on Corporate Governance. “Spotify Case Study: Structuring and Executing a Direct Listing”.
- Slack. “Investor Relations: Corporate Overview”.
- Fred Lager. “Ben & Jerry’s: The Inside Scoop: How Two Real Guys Built a Business with a Social Conscience and a Sense of Humor”, Pages 90, 98-100, 102-103. Crown, 2011.
- Bloomberg. “Slack’s Direct Listing Reference Price Is Set at $26 by NYSE”.
- Bloomberg. “Slack Shares Open at $38.50 on NYSE After Unusual Direct Listing”.
