Alternative Business Funding: Direct Public Offerings

Written by Dave Lavinsky

Many ambitious entrepreneurs dream of scaling up their business to the point of an IPO, or Initial Public Offering of stock. In fact, so many do that venture capitalists (people who provide private financing for businesses) often complain about it. What might be a much more realistic option, one which can help raise capital for a much smaller business, is the Direct Public Offering, or DPO.

You won’t raise (nearly) as much money as an IPO, but it will cost you significantly less, there will be minimal ‘red tape’ in comparison, and it is available to businesses at much earlier stages than as a relatively mature IPO-ready business. Another key advantage is the retained ownership stake. Raising DPO capital generally means giving up a smaller ownership stake at higher valuation than would be the case with traditional venture capital. This means, if you end up selling your business, you’ll take a bigger piece of a bigger pie.

In a Direct Public Offering, a small business sells its equity to interested parties. This could mean anyone: a supplier, family member, contractor, or other individual or institution. This is a key advantage because, like customer financing, it can create people who have a double interest in your company; for example, a contractor who also owns an equity stake wants to continue working with you, but also wants to see your business succeed. Since equity offerings can be very newsworthy events, this is also an opportunity for you to promote your business through a marketing and public relations campaign.

Regulations are comparatively easy to comply with-there are several key things that need to be done, in addition to whatever local laws are applicable. You must provide audited financial statements and a prospectus to potential investors, as well as make stock information and financial reports available to the general public.

Direct public offerings are not easy undertakings by any means, however. As with any process involving securities regulation, it takes a great deal of time and effort, as well as the specialized skills of such professionals as lawyers and accountants. However, if your business is mature to the point where it could reasonably put its equity on the market as stock, the DPO is an option you need to consider when you begin to look for funding. Specific regulations vary, but there are three different levels of DPO available. One allows you to raise up to $1,000,000 in one year, a second allows for up to $5,000,000 in one year, and a third has no ceiling in the amount of capital you can raise. Contact the Securities and Exchange Commission for specific details.


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