Pre IPO Insights
Direct Public Offering

6 May 2022

Direct Public Offering (DPO) – Overview, How It Works, and Process

Direct public offerings are designed to give small businesses access to the public capital markets. Unlike IPOs (initial public offerings), the process is less complex and cheaper. Are you an entrepreneur or a potential investor? Here are various things you should know about a DPO.

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What is Direct Public Offering

A DPO (direct public offering) is an offering where an organization directly offers its securities to the public to acquire capital. An issuing firm using a DPO eliminates the intermediaries: the underwriters, broker-dealers, and investment banks, which are common in IPO (initial public offering).

By getting rid of the intermediaries, private placements reduce the cost of raising capital for a direct public offering. As a result, a DPO is attractive for startups, small companies, and institutions with a loyal and established client base. DPOs are also referred to as direct placements.

How does a Direct Public Offering Work?

When issuing securities via a DPO, a company raises capital independently without the limitations involved when working with venture capital and financial institutions. The terms of the DPO depend on the issuer, who customizes and guides the process based on the firm’s best interests.

The issuer establishes the offering price and limits the total securities an investor can purchase, the reporting requirements, and the minimum investment for each investor. They also define the offering timeframe for investors to buy the securities before the exercise is closed and the settlement date.

On December 22, 2020, the U.S. Securities and Exchange Commission (SEC) authorized companies to raise money via direct listings, bypassing the conventional IPO process. In the direct listing, organizations trade their shares without relying on investment banks to underwrite the process. Besides saving on fees, firms that use the direct listing process avoid IPO limitations, such as lockup sessions that bar insiders from disposing of their shares for a specific period.

What is a Direct Offering Vs Public Offering?

A direct and public offering are similar because private companies can use both methods to go public and start selling common stock in the open market. An IPO is a conventional method that organizations have used to go public in the past. However, DPOs are fast becoming popular. An initial public offering usually issues pre-market IPO shares, but a direct public listing starts trading immediately on the exchange when the market opens.  

Going public through a DPO is usually cheaper and faster than through an IPO, where one or even more financial institutions have to underwrite the issuance of stock. When companies go public through an IPO, the underwriters circulate shares among specific brokerages. The brokerages then instill restrictions on who should or should not participate in the initial public offering.

DPOs create a common playing field where stocks are listed in the market for everybody to access. While the availability of shares depends on early investors, prices are based on market demand. As a result, DPO can be riskier than IPO because market swings and volatility mar them.

Is Direct Public Offering Good?

 Direct Public Offering

A DPO can be ideal for startups and small businesses that may not gain from an IPO. Many entrepreneurs believe that DPOs are better than IPOs because they don’t have to pay back any raised capital.

What does it Mean when a Company makes a Direct Offering?

Organizations that use direct listing do so not to raise capital but enjoy the benefits of being a public company, like enhanced liquidity from current shareholders. Any firm that chooses to go public through a DPO should have a particular profile. For example, it has to be appealing to the market. Here are the characteristics of companies that go public via a DPO.

  • They are customer facing and have a solid brand identity
  • Do not require significant extra capital
  • Have easily understandable business models.

Popular companies that went public via direct listings include Slack and Spotify. The companies had solid brands and reputations before going public.

What are the Benefits of a Direct Public Offering?

The direct listing comes with various benefits for different companies. For example, going public allows shareholders to dispose of their shares freely. In this case, the company provides liquidity to the existing shareholders.

The cost of a DPO is lower than that of an IThe directrect listing enables firms to avoid paying huge fees to investment banks. It also helps them avoid the indirect expenses of selling stocks at a discount.

What are the Risks and Benefits to a Company Making a Direct Public Offering?


DOP Risk

The opening stock price depends on market demand and potential fluctuations. The company and its board of members cannot determine the price for shares.

Organizations could spend more on financial advisors than on IPO underwriting fees.

A DPO is limited by the number of shares existing investors and employees sell on the open market.


More liquidity for existing shareholders

Companies don’t struggle with the FINRA valuation review process

It’s a safe path, according to the stock exchange and SEC experts

What is the difference between a Direct Public Offering and a Public Offering?

The core difference between an IPO and a direct listing is that the former issues new stocks while the latter trades existing stocks.

Unlike public offerings, the direct listing does not involve underwriters. Selling at discounts and leveraging underwriters increases the cost and time for the organization to issue new shares.

A direct listing process does not come with the lockup period, as with IPOs. In conventional IPOs, organizations have lockup periods that bar existing shareholders from trading their shares on a public market.

Existing shareholders in direct listings can trade their shares immediately after the company goes public. There is no issuance of new shares, meaning that transactions only happen if the shareholders trade their shares.

Timeline of a Direct Public Offering

The time required to develop a DPO varies from a few months to a few days. During the development phase, the company launches an offering memorandum describing the issue and the security that will be traded.

Securities suitable for selling via a DPO include preferred shares, common shares, and debt securities. The firm can also market the securities via social media platforms, magazines or newspaper ads. Before publicly availing the securities, the issuing firm prepares compliance documents for filing with the securities laws body of each state where they will be running a DPO.

The documents usually include updated financial statements, articles of incorporation and the offering memorandum. Based on your state, getting regulatory consent on a DPO prospectus application can take two weeks to two months.

Many DPOs don’t ask issuers to register with the SEC (Securities Exchange Commission) regulation D since they qualify for some federal securities laws and crowdfunding exemptions. For instance, Rule 147 or intrastate exemption bars registration with the SEC regulation A if the firm is registered in the state where it’s offering securities.

How a DPO Is Formally Announced

After getting consent on their registration statement, the issuing firm announces its offering through a tombstone ad. The issuer then sells the securities to both accredited investors and their non-accredited counterparts.  

How a DPO Is Traded

While an issuing firm can raise funds from an institution via a DPO, a trading exchange channel for its securities won’t be available. Usually, an IPO trades on Nasdaq or NYSE following its offering. However, a DPO doesn’t come with such a trading platform but can trade in over-the-counter markets. DPO securities may encounter illiquidity if unregistered or fail to conform to the Sarbanes-Oxley Act’s conditions.

Prominent Examples of DPOs

In 1984, Jerry Greenfield and Ben Cohen needed capital to fund their ice cream business. They publicized their ownership stakes via local newspapers for $10.50 each share, where every investor had to purchase a minimum of 12 shares. Their loyal fans in Vermont jumped on the offer, and the company raised more than $700,000 in a year’s time.

On April 3, 2018, Spotify, a popular music streaming service, initiated a DPO. the company chose to underwrite its shares through a direct listing. Spotify’s DPO was unique among similar offerings. The company is listed on the New York Stock Exchange. As an already thriving organization, Spotify bypassed the typical fundraising and publicity efforts that come with an IPO.


A DPO is not as complicated as an IPO. It occurs when a company plans to sell existing securities to the public without the involvement of an intermediary. While DPOs can be appealing, companies should always consult with experts who understand securities laws before initiating one.

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