Raise Capital Through a Direct Public Offering or DPO

Great article on direct public offerings with business and owner examples.

Great article on direct public offerings with business and owner examples.

I have written articles on direct public offerings before. DPOs, as they are often called, are a viable way for companies that have a number of customers, partners or other stakeholders to raise money from these individuals and entities instead of the more “traditional” venture capital or private equity funds. A direct public offering often falls outside the purview of the Securities and Exchange Commission. When this occurs DPOs do not have the same strict regulatory requirements that a Regulation D Section 505 or 506 offering has. Specifically, with a DPO you can sell shares in your corporation to non-accredited investors.

For individuals, an accredited investor is a single individual or married couple who has a personal net worth of $1 millions not including their personal residence. A single individual who has annual compensation of $200,000 or a married couple with combined annual compensation of $300,000 also qualify as accredited investors.  Companies also qualify as accredited investors. See references below for more information on “company as accredited investor” requirements.

DPOs do not require companies to prepare private placement memorandums or use investment bankers. If companies use a DPO to raise $1 million or less from investors located only in the primary state in which they do business, these companies may be completely excluded from SEC requirements. Instead they will be subject to state requirements, which tend to be less involved than those of the SEC. Companies that choose to raise funds across state lines or to raise funds of $1 – $5 million must comply with certain SEC regulations. However, these are still generally less restrictive.

Although companies do not need an investment banker and therefore can save significantly on legal fees, it will take the company’s owners or management team more time and effort to raise the money since they’ll have to do more of the work. However, this is no different than pursuing venture capital firms or private equity firms. It can take significant time and effort on the part of owners and executive management to woo, then present to a number of these firms. The more firms, the more time and effort it takes. However, since companies are going after a wide swath of potential investors, the likelihood of success may be higher.

For more information on DPOs, especially from the viewpoint of those that have used them, check out the New York Times Small Business article,  Seeking Capital: Some Companies Turn to ‘Do-It-Yourself I.P.O.’s’.

 

References