How to Conduct a Direct Public Offering On an Exchange including Strategies

A Direct Public Offering (DPO) lets a company raise capital directly from the public without intermediaries such as underwriters. This method can reduce costs and give companies more control over the offering process. DPOs appeal to small to medium-sized enterprises trying to expand their investor base. However, it is not necessarily right for everyone. What do you need to know about a DPO, and how can you decide if it is right for your business?

What Is a Direct Public Offering?

A Direct Public Offering is a financial mechanism that enables companies to offer their securities directly to investors without the mediation of underwriters. This process involves selling shares directly to the public, including retail and institutional investors, which can help the company reach a broader audience. DPOs are often executed to capitalize on the existing customer and supporter base, turning them into shareholders, which can enhance brand loyalty and engagement.

The regulatory framework governing Direct Public Offerings primarily involves compliance with the Securities Exchange Commission (SEC) regulations. Companies opting for a DPO must adhere to specific filing requirements, including registration statements and prospectuses, which detail the company’s financials and the risks associated with the offering. These regulations are designed to protect investors by ensuring transparency and providing them with all necessary information to make informed decisions.

Strategies for Direct Public Offerings

Strategy 1: Reg D and/or Reg CF Offerings with a Form S-1 Resale

Companies may try to raise initial capital from private investors through Regulation D or Regulation Crowdfunding offerings and later transition to public markets through a Form S-1 resale. This strategy lets companies secure funds from a select group of investors and subsequently offer shares to the general public, increasing liquidity and potentially raising additional capital.

After filing Form S-1, the next step is to get listed on an exchange of choice. This means meeting the listing criteria for that exchange, which typically means financial, regulatory, and governance requirements. After approval, the company can start trading its shares on the exchange. This broadens the investor base and enhances the company’s credibility and visibility in the financial community and industry.

This strategy offers several benefits:

It allows companies to raise funds from private investors quickly, which can be pivotal for early-stage developments and operational expansions.
Gradual market entry eases the transition to public markets and provides an opportunity to manage market reactions and investor expectations on a controlled scale.
Opening the offering to the public can significantly broaden the investor pool beyond initial private backers.
Companies can time their public offerings based on market conditions and internal readiness.
Successfully moving from private to public investment can enhance a company’s reputation in financial markets.

Strategy 2: Reg D and/or Reg CF Offerings with a Form 10 Filing

This approach involves raising capital through private offerings under Regulation D or CF and filing a Form 10 filing to the SEC. This filing declares the company to be a public reporting entity with the SEC. Still, it does not involve the sale of new shares, allowing existing shares to become freely tradable on the public market. Shareholders typically must hold the securities for one year under Rule 144 requirements to make the shares free trading.

Key advantages include:

Simplifies the process of becoming a publicly traded company, as it avoids the complexities and costs associated with traditional public offerings.
This provides flexibility in adapting to market conditions, as companies can choose optimal times for making their shares publicly tradable based on market stability and investor interest.
Being a public reporting company increases transparency and may attract more sophisticated investors, ensuring compliance with securities laws.
Builds investor trust and relations, as it establishes credibility and engagement, fostering a deeper connection with investors.
The company maintains control over the capital structure without additional share issuance, allowing existing shareholders to benefit from increased liquidity without dilution.

Strategy 3: Utilizing Reg A+ for Direct Listing

Companies can raise capital directly through a Regulation A+ offering, using Form 1-A for registration, and then list on an exchange once they meet the requirements. This strategy involves selling free-trading shares directly to the public during the offering, which can immediately be traded on the exchange.

This is usually done through an online crowdfunding campaign, which typically takes a few months to complete. Once this campaign is finished, and enough free-trading shares are issued, the company can then apply to be listed on the exchange. This strategy facilitates capital raising and enhances the company’s market presence, making it more accessible to a broad range of investors.

The benefits of using Reg A+ include:

Enables wider access to accredited and non-accredited investors, which can dramatically increase the potential investor base.
These offerings offer a more streamlined SEC review process than traditional public offerings, which can speed up the time to market, allowing for quicker capital access.
Provides immediate liquidity for investors through free-trading shares, which enhances the attractiveness of the offering to potential investors seeking quick entry and exit options.
Listing on an exchange can increase a company’s visibility and credibility and attract more attention from institutional investors and analysts.
This option allows for larger offerings than other crowdfunding options, as companies can raise to $75 million annually, providing significant funding opportunities.

Strategy 4: Direct S-1 Filings Without an Underwriter

Some companies opt to raise capital through a Form S-1 filing without an underwriter by directly approaching their existing investor base. Companies typically use this strategy with investors willing to participate in a new offering. Once shares are sold, the company may list onto the exchange of their choice, as long as they meet the exchange’s requirements.

This direct approach offers several advantages:

Reduces costs associated with underwriters by eliminating intermediaries during the public offering.
Strengthens relationships with existing investors by directly involving known investors to enhance trust and long-term commitment.
Allows companies to maintain greater control over the terms of the offering, as direct negotiations can result in more favorable terms for both parties.
This can be faster and simpler than traditional public offerings, expediting access to capital.
The company can select investors who understand its long-term vision, aligning investments with strategic goals and ensure support during growth phases.

Challenges to Consider for DPOs

Companies that decide to do a Direct Public Offering should consider the following drawbacks:

Ensuring full compliance with all relevant securities laws is complex, as missteps can lead to significant legal and financial repercussions.
It can be uncertain how the market will receive the DPO, and a poor reception can affect the success of the offering and future capital-raising efforts.
Preparing for a DPO requires substantial internal preparation, with robust systems and processes in place to handle the demands of public trading.
It is crucial to educate potential investors about the value and potential of the investment to build investor confidence and understanding.
Managing a public company involves ongoing obligations and increased scrutiny, making it challenging to ensure consistency in business operations.

While DPOs offer a pathway to public markets without traditional underwriting, they require careful planning and strategic execution. Companies must weigh their options and choose the right strategy based on their needs and capabilities.

How To Choose the Right Strategy for Your Needs

Selecting the right strategy for a Direct Public Offering involves thoroughly assessing the company’s financial condition, strategic goals, and investor base. Companies should consider their ability to meet regulatory requirements and manage post-offering responsibilities. Market stability, investor sentiment, and the competitive landscape should influence the strategy.

Consulting with financial advisors and legal experts can provide valuable insights and help navigate the complexities of a DPO. By carefully considering these factors, companies can choose the DPO strategy that best aligns with their long-term objectives and current capabilities, ensuring a successful transition to the public markets.