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Direct Public Offerings: Benefits and Drawbacks

Aug 17, 2007
The direct public offering offers a relatively unique form of financing that is just beginning to catch on with business owners and individual investors.

In a direct public offering, a business issues registered shares without the full expense of an initial public offering. Since direct public offerings are issued through officers and directors, there are no underwriters. Shares are marketed directly to parties that might have an interest in the company, and the buyers often include customers, distributors, or employees.

For companies that aren't yet large enough to benefit from an initial public offering, a direct public offering can be an appealing alternative. Many consider the biggest advantage of a direct public offering to be the fact that capital raised doesn't have to be paid back. Corporations can give up a share of the company in exchange for the funds it needs. Often, those funds are obtained with far less dilution than what could have been expected with a venture capital firm.

In some instances, a company may find it easier to raise money through a direct public offering than through traditional debt financing like a bank loan. This is especially true of high-risk businesses that involve little physical capital that could be used as collateral. A direct public offering allows the corporation to market itself to those who are more capable of understanding and bearing the risk.

Since investors have long been tormented by stories of those who invested early in successful companies, the sale of a direct public offering can be relatively easy if the right audience is located. Once that happens, the business may even receive extra assistance in the form of contacts and encouragement from investors. That strong interest in the success of the company can be an excellent off-the-books asset. Even the efforts of prospecting for investors can be beneficial to the company. The campaign for funding can double as advertising, making a new audience aware of the company and its services.

Despite the clear benefits, a direct public offering has several drawbacks. The process is not simple, and involves a great deal of information gathering to prepare a registration statement to file with the SEC. Similar to an initial public offering, a direct public offering can divert the attention of employees for many months. A company that is a short-staffed might find itself in a state of chaos when it is most important to make a good impression, unless it hires a professional consulting firm to help them.

The process of preparing for a direct public offering is less expensive than an initial public offering with an underwriter, but not by much. Instead of spending money on underwriter's commissions, some of that money will need to be diverted to marketing efforts. Since there is no underwriter, there is no one else to help sell the offering. While some corporations may seek out the assistance of an investment bank, this adds another expense to the process.

If a direct public offering remains appealing after carefully considering the benefits and drawbacks, it's a good idea to consult with a knowledgeable and experienced consulting firm, accountant or lawyer that is well-versed in securities laws. A number of more conventional funding methods may be more appropriate in any given scenario, so a professional can serve as a guide in the process.
About the Author
Joel Arberman is the Managing Member of Public Financial Services, LLC. We help private companies through the process of becoming publicly traded via an initial public offering or direct public offering. Learn more at www.PublicFinancial.com
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