Question

A Direct Public Offering (DPO, Direct-Listing) is an alternative to an Initial Public Offering (IPO) in which a company does not work with an investment bank to underwrite the issuing of stock. While forgoing the safety net of an underwriter provides a company with a quicker, less expensive way to raise capital, the opening stock price will be completely subject to market demand and potential market swings.

In a DPO, instead of raising new outside capital like an IPO, a company’s employees and/or investors convert their ownership into stock that is then listed on a stock exchange. Once the stock is listed shares can be purchased by the general public and existing investors can cash out at any time without the ‘lock up’ period of traditional IPOs.

Spotify [Spotify Technology SA (SPOT – US: NYSE), DPO, 04/03/2018] and Slack [Slack Technologies Inc. (WORK – US: NYSE) DPO 05/33/2019] are recent examples of companies that have opted to skip the traditional IPO process and instead list their shares directly on an exchange.

What are the pros and cons of a DPO? What makes a successful DPO? Have there been notable failures? How does a Security Firm deal with its clients that want in on the action?

Answer 1

Pros:

• DPOs give investors an opportunity to get in on the ground floor of exciting investment opportunities and participate in high risk/reward venture-stage funding typically limited to wealthy or institutional investors.
• A DPO may be serve as an initial fund raising event before a company goes on to a conventional IPO. Companies such as Ben & Jerry’s, for example, followed its DPO with successful IPOs, resulting in rich returns for early investors.
• DPOs allow individuals a chance to invest in companies with whom they have an affinity or shared values, or whose products they like and admire. As a customer, you are contributing to the success of your investment.
• Financial disclosure: DPOs require that companies prepare a comprehensive prospectus containing relevant financial information on the business, its finances and risk factors

Cons:

• DPOs are akin to public venture capital, with all of the risk/reward that come with early stage investing.
• Liquidity is an issue. There may not be a way to trade shares on a secondary market, and when there is, volume may be scant. And not all companies will go on to an IPO or a sale.
• There is no Wall Street underwriter conducting due diligence on the company. And lacking a market mechanism, companies issuing shares may set an arbitrary price.

THINGS THAT MAKE A SUCCESFULL DPO

1. Defining an attractive ‘equity story’.

2. Design an adequate price discovery process

3.Adjusting the offering size and structure to ensure the achievement of the company’s goals and the execution of its business plan

REASONS FOR FAILURE

The disadvantages of a direct public offering include: the company must raise its own capital without the assistance of professional financiers, the process has significant cost which may significantly reduce the effective capital raised, like any financing, it takes management time and attention from business .

In a DPO, the company raising money sells shares directly to the public, bypassing the Wall Street intermediary. So instead of the shares going to the Wall Street underwriter’s well-heeled clients, everyday investors—including the company’s customers, friends, fans and supporters—can get in at the ground floor, and reap the same kind of returns (or losses) that are typically reserved for insiders. And, by cutting out the financial middleman, DPOs are accessible to companies that would not be able to afford a conventional IPO, which can easily cost $1 million or more.