Direct path to public funding: Unveiling the DPO process

Companies often require extra funding when they aim to grow their operations. Typical sources of such funds involve loans, venture capitalists, and investments.

But, how can a company raise funds directly from the public? Here, IPO and DPO are the two main ways to go. IPOs these days are gaining immense popularity. 

However, without knowledge of DPO, you might overlook numerous opportunities in your trading endeavours. So, let’s dive into DPO in this article and explore its functionality.

What is a direct public offering?

DPO’s full form is direct public offering, a corporation sells its shares to the general public without going through any intermediaries. DPO is alternatively referred to as direct listing or direct placement. Despite sharing some characteristics, a DPO and an IPO are far from identical. A DPO bears a resemblance to an IPO. 

DPO enables a company to sell shares directly to the general public, without the need for any intermediary involvement or support. Investment banks, underwriters, dealers, brokers, and other financial institutions are all examples of intermediaries. Consequently, the expense of acquiring funds is greatly diminished. 

However, intermediaries often take on the responsibility of underwriting securities, meaning that underwriters may provide a guarantee for the sale of a specific number of securities.

How does direct public offering work?

Restrictions related to intermediaries do not apply to the DPO process. When issuing a DPO, the issuer has the right to decide on the conditions. 

The minimum investment allowed per investor, the offer price, the offer duration, the bid-ask spread, the settlement dates, and so on are all decisions that the issuer can make. The offer is structured in a way that is advantageous to the company’s interests. The DPO allows for some leeway in the offer’s terms and conditions because of this.

So, how are DPO securities allotted? Here are the key steps involved in DPO process:

1. Preparation stage
   • A comprehensive offering memorandum is prepared, providing an introduction to the issuer and detailing the type of security being offered.
   • The issuer determines the method of distributing the offering memorandum, such as through telemarketing or social media.
2. Regulatory approval
   • The financial statements and offering memorandum are among the compliance documents that the issuer usually submits to the regulatory body.
   • The regulatory authority assesses the financial well-being and adherence to regulations of the company and approves the DPO if deemed suitable.
3. Exemptions to regulations
   • If the governing body notifies applicable exemptions, the issuer may be exempt from certain regulatory requirements.
4. Offering rollout
   • After receiving approval, the issuer releases the offering memorandum and starts the DPO by announcing it with a tombstone ad.
   • The securities are made available to retail and HNI investors, financial institutions, and familiar connections such as clients and employees.
5. Closing the offering
   • The DPO concludes either when all securities are sold or by the specified closing date mentioned in the offering memorandum.
   • If the minimum number of shares is not sold, the issue will be cancelled and investors will receive a refund of their funds.
6. Post-offering considerations
   • Shares issued through a DPO may encounter challenges with liquidity in OTC markets as they are not listed on an exchange.
   • Shares may be allocated based on the order in which they are received or proportionally if there are more orders than available shares.

By following these steps, the DPO can be conducted following regulations and effectively reach potential investors.

IPO vs DPO

When a privately held company decides to go public, it undergoes an IPO where it offers its shares to the public for the first time. This enables the company to secure equity capital from the general public. 

The process of a company moving from private to public status can be a pivotal time for private investors to optimize their investment returns. This is often due to the presence of a share premium that benefits existing private investors.

Although IPO and DPO are both means for a company to secure funding, they have distinct differences. New shares are issued and made available to the public through an initial public offering (IPO). However, a DPO, which is also referred to as a direct listing, enables a company to directly sell its existing shares to the public without the need for an underwriter. 

In a DPO, the shares are sourced from the company’s existing stock and sold directly on the market.

IPO vs DPO vs FPO

A Follow-on Public Offering (FPO) involves a publicly listed company raising extra capital by issuing and selling new shares of its stock to the public through a stock exchange. The primary reasons for an FPO usually include financing new projects or expansion plans, debt repayment, or augmenting the company’s working capital.

The main difference between an IPO, DPO, and FPO is determined by their purpose and the stage of the company. 

An IPO represents the initial offering of shares by a company to the public, signifying its shift from being privately held to becoming a publicly traded entity. A DPO allows a business to bypass middlemen and sell shares to the general public directly. 

On the flip side, an FPO is a strategy employed by a company that is already publicly listed to generate extra funds by issuing additional shares.

Bottomline

Grasping the intricacies of Direct Public Offerings (DPOs) unveils a wealth of possibilities for businesses aiming to procure funding directly from the general public. Unlike traditional IPOs, DPOs enable companies to directly engage with investors, eliminating middlemen and lowering expenses.

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