Advantages
and Disadvantages to a Direct Public Offering
A direct public offering (DPO) is a financial tool that facilitates
a company to offer stock directly to investors—without using a broker or
underwrite as a mediator—and avoid certain expenses related with "going
public" through an initial public offering (IPO). DPO is a form of exempt securities
offering, which implies that companies choosing this form of offering are not
liable to many of the registration and reporting requirements of the Securities
and Exchange Commission (SEC).
DPOs first became accessible to small businesses in 1976, but
they only attain recognition starting in 1989, when the rules were made simple.
The small business initiative program was started by SEC in the year 1992 which
eliminated even more hurdles that limited the ability of small companies to
raise money by selling stock. In the recent years Internet has enhanced the use
of Direct Public offering a lot. In fact, around 200 small companies in the
latter half of the 1990s went public via this route, either by directly offering
their stock online or through their web sites or by listing with one of the several
online DPO forums.
A DPO
falls into one of three regulatory classes:
Regulation
D: this is the most popular form of DPO; a
regulation D also called Small Corporate Offering Registration (SCOR) enables
the company to raise up to one million dollars every 12 months. Shares are
registered with state’s securities regulatory administration.
Regulation
A: enables a company to raise up to five
million dollars annually. However, Reg A DPO mandates registration with
the Securities and Exchange Commission's Small Business Office. This escalates
the costs of compliance and reporting, and adds another agency monitoring every
90 days.
Intrastate
DPO: there is no upper limit on the amount of the
fund which can be raised, but the fund must be raised within the states.
Advantages
A
company going for a DPO is adding equity by attracting new shareholders from
the public. There are more than one reason why DPO is an increasingly popular
alternative for growth oriented micro and small business.
·
A DPO is less costly to the company when compared
to an IPO.
·
The regulatory burden in case of DPO under
Regulation A is comparatively minimal.
·
The SEC has encouraged the use of the Internet
for DPO's.
Generally
when there are high expectations from a company to attract venture capital,
then the venture capital firm generally asks for stake and/or substantial
amounts of equity. In some cases, the entrepreneur loses control of his or her
company and can be removed. The Direct Public Offering is a potential
alternative to IPOs and venture capital. DPOs enable the owner of the
aggressive companies to raise funds that they need without sacrificing control
on their corporations. The costs, which are associated with the DPO, are far
more manageable and rational.
For investors, it is also a smart investment alternative. The investors hardly
have access to venture capital investment, and thus they cannot access the rate
of returns that those investments can bring. Thus, the DPO method is
advantageous for both investors and entrepreneurs.
Disadvantages
The amount of money, which
a company can raise through DPO in any 12 month period, is restricted by
regulations.
Arriving at a market price
is difficult because DPO is not issued and traded publicly like IPOs and thus
it may require regular valuations of the company assets, both realized and
unrealized.
Administrative and legal necessities for
creating and maintaining a DPO are noteworthy, and divert company resources
from expansion initiatives. The costs of creating and staying in compliance
with DPO requirements may cost more than the company has to pay for expansion
capital.
Meeting state or SEC
requirements can be difficult, time-consuming and expensive.
Sufficient funds are hard
to raise through DPO.
Any
company should ask and take the suggestions of the tax attorney or the chief
financial officer about the cost of creating and maintaining a compliant DPO before
taking the step and work those numbers over and again to create the best and
worst case scenario. This gives any company the better picture of the value of
the DPO to business, both for short and long term.
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