In contrast to the vast majority of tech companies that go public using an Initial Public Offering (IPO), Slack recently used a Direct Public Offering (“DPO”). Before that, Spotify went the DPO way. Could this be the beginning of a tech trend?
With a DPO, a company can file with the SEC in a much more simplified fashion than an IPO, and raise substantial capital without using brokerage firms as underwriters. Less money is needed to pay underwriters and other costs, thereby freeing up more capital for the company.
How does it work? Read my lips – No New Shares! In a DPO, shareholders are given the option to sell their shares directly into the stock market. So, no new shares are offered, thereby allowing the company a more streamline method to go public. Also, IPO shareholders are usually restricted from selling shares for six months after the offering. Thus, a DPO makes it much easier for employees and early investors to cash out much earlier.
It should be noted that a DPO can be risky. Some of the more prevalent risks pertain to the level of volatility, or whether the company is relatively unknown, or is desperate to raise more capital, or does not have a significant amount of employees or investors eager to sell their shares in the stock market.
Ultimately the key benefit of DPOs is the relative simplicity, transparency and low cost attained by eliminating the traditional underwriter. Yet even in a DPO, the issuing company has to find market-makers (registered broker-dealers) who quote prices for the company’s securities in the trading market, creating the “bid” and “asked” needed so that liquidity is provided for the company’s securities holders.
So, while notably less expensive, DPOs do require the company to engage professionals and transfer agents, and to make regulatory filings. Most importantly, an experienced corporate attorney is mandatory. Even with the flexibility and reduced regulatory restrictions that DPOs provide, there are still federal and state rules applicable to these offerings. The issuing company and management could expose themselves to risks of lawsuits, fines and penalties and investor rescission obligations if they are without proper legal guidance.
These are just some of the aspects of DPOs for businesses that you should consider. Before determining whether a DPO is right for your business, contact an experienced lawyer to review, assess, advise, and then to prepare you and your company for success.
If you have any questions about this post or any other related matters, please email the Business Law Practice Group Co-Chair, Graham Simmons at firstname.lastname@example.org.