During the technology boom in the ’90s, there was a lot of buzz about direct public offerings. But when the tech bubble burst, so did much of the interest in the DPO.
A regulation change at the SEC added to its decline, and the DPO has all but disappeared as a means of raising capital. But that doesn’t mean it’s not right for your company; it’s just not as attractive an option as it used to be.
“With a DPO, you sell the stock at what it’s worth, cutting out the middleman and the fees,” says Christopher Hubbert, partner with the law firm of Kohrman Jackson & Krantz. “The public participates on the ground floor. With an IPO, the investment bank might buy the stock at $9.50 and sell it for $11 or $12. With a DPO, the public can get in on the ground floor. Theoretically, everyone benefits.”
The explosion of the Internet made this possible, giving companies a means of reaching large numbers of potential investors and distributing their stock for minimal costs. Hubbert recalls working on one transaction in which investors could buy the company’s stock online with a VISA card.
There are two types of DPOs: Regulation A, which is limited to $5 million, and Rule 504, which is limited to $1 million; both are exemptions under the Securities Act of 1933. With the Reg A, there is a filing requirement with the SEC. Your offering is reviewed and commented on, similar to what an IPO goes through.
Rule 504 filings fall under the jurisdiction of state laws. In Ohio, state officials perform a merit review of the filing to decide whether it is fair.
Several years ago, the SEC clamped down on DPOs and issued new rules.
“There was a lot of fraud, and the securities people were concerned about stocks being pumped up, then dumped on the market,” says Hubbert. “New rules were adopted requiring the filing with the SEC and that all information be made public. This increased the burden to that of a publicly traded stock, so one of the advantages of a DPO has fallen by the wayside.
“It’s a bigger project to complete a DPO than it used to be.” How to reach: Kohrman Jackson & Krantz, (216) 696-8700 or www.kjk.com
Direct choice
So who’s a DPO good for?
“If you have a hot product, a good presence on the Web or a strong customer base to sell to, then a DPO might be right for you,” says Christopher Hubbert, partner at Kohrman Jackson & Krantz. “If you are a supplier to a limited number of companies and you make gaskets, then you are probably not a good candidate for a DPO.”
Other DPO facts:
* “Trying to do a 504 for a million for most companies isn’t going to be worth it because of state regulators,” says Hubbert.
* If you are considering a 504 offering, you must obtain approval in every state in which you will sell your stock. Getting Ohio approval means you can only sell to customers or other investors in Ohio.
* If you are considering a Reg A offering, expect to spend at least three months preparing documents for the SEC review.
* Much of your private information will become public when the offering is complete, so competitors and employees may gain access to information they normally wouldn’t have.
* Your business is, in most cases, going to have to be organized as a C-Corp to complete a DPO.
* When the stock is sold, you will have fiduciary duties to your shareholders. “You can’t take all the money out of the business as salary and not pay dividends,” says Hubbert. “A lot of small business owners treat their business as a piggybank and take money out of the register.
“You can’t do that if you bring on investors.”
