Direct Public Offering (DPO): Expanding Your Team of Stakeholders

Access to Capital

A Direct Public Offering, or DPO, is a method of raising capital that's grown in popularity in uncertain economic times. A DPO, like an initial public offering (IPO), enables small and mid-sized companies to raise cash for expansion and long-term growth, but there are significant differences between a DPO and an IPO that are worth noting.

Unlike an IPO, which offers stock shares (company ownership) on an open stock exchange, a DPO raises capital by selling shares of stock directly to employees, customers, suppliers, professional or individual investors. A DPO is significantly less expensive to structure than an IPO - an important consideration when cash counts (and it always counts in business).

Further, a DPO isn't hamstrung by the regulatory restrictions and guidelines associated with an IPO - another important consideration in weighing the best means to raise the cash your company needs to continue down the road to increased profitability.

The biggest downside? Typically, a DPO raises less capital than a well-promoted IPO. Determining just how much capital you'll need in the months and years ahead is often the tipping point in deciding between an IPO and DPO. How much will you need to reach your projections? How much to meet your numbers today and in the years ahead?

Here's the process for the creation of a DPO - an ideal capital development tool for many growing businesses:

  • Stock is registered with state administrators instead of with the Securities and Exchange Commission (SEC).
  • The company generates a prospectus that clearly lays out company financials, fiscal history and reasonable projections for further growth. There are regulations that must be followed in the preparation of a DPO prospectus, so hiring legal counsel to help develop your DPO prospectus is just plain smart business.
  • The company makes financial reports and documents publicly available.
  • The company provides accurate and timely information about the business to investor-shareholders, usually on a quarterly basis.
  • The company is audited by an accredited, independent accounting firm, which means your books must be current, clear and down to the penny so auditors give your business the "thumbs up."

Here's how it works in simple terms. You offer an equity stake in your company through the issuance of stock shares. One of your vendors decides to invest in your company and purchases a certain number of shares. You use the proceeds of the stock sale to grow your business.

In return for its investment, the vendor receives an ownership stake in your company, and in many cases, other benefits like proprietary products and preferential terms. Your company success is based on the success of investors like these so, naturally, you make success easier for all company stakeholders and they return the favor - a HUGE, often unrecognized, benefit of a DPO.

Types of Direct Public Offerings

A DPO falls into one of three regulatory classes:

Regulation D: The most widely known form of DPO, a Regulation D, also called a Small Corporate Offering Registration (SCOR), equips you to raise up to one million dollars every 12 months. Shares are registered with your state's securities regulatory administration.

Regulation A: Enables your company to raise up to five million dollars annually. However, a Reg A DPO requires registration with the Securities and Exchange Commission's Small Business Office. This increases the costs of compliance and reporting. In addition, it adds another agency looking over your shoulder every 90 days.

Intrastate DPO: This class of DPO isn't capped on allowable sale of stock but you must raise funds within your state, be incorporated in that state and do at least 80% of your business in that state, hence the term "intrastate" DPO.

This type of DPO is ideal for growing businesses with a clearly-defined, regional service area. Planning on going global? An intrastate DPO is not the way to grow.

Advantages Of A DPO

The pros and cons of DPOs should be discussed with a tax attorney familiar with state DPO regs. You also want your CFO or company accountant by your side every step of the way. Creating a DPO is a big step so utilize your human capital to make the right decision for your business. It's a no brainer.

The advantages of DPOs:

  • Stock sales raise capital you are not required to pay back, as you would a commercial loan. Investors accept and share both risk and reward generated by your business.

    Because DPO investment capital isn't a loan, you don't make interest or principal payments on the funds you receive. Investors grow wealth through appreciation of share price.

  • Selling shares of stock through a DPO won't require your company to give up as much equity as it would using venture capital (VC) investors. A DPO keeps greater control of the company in your team's hands.
  • Marketing shares of stock simultaneously "sells" your company brand to customers, clients, vendors, contractors, subs, suppliers and others with whom you conduct business regularly.
  • Since the legal and accounting requirements for a DPO are relatively simple, a DPO measures investor interest - a critical metric when you decide to take the company public.
  • Employees, customers and suppliers who purchase an ownership stake in the company have a vested interest in seeing your company succeed. You expand the team outside the four walls of your facility.
  • Capital loans are easier to obtain when lenders recognize that investors participate in risks faced by the company. This enables you to leverage the good name of your business to raise more capital at better rates and terms.

Disadvantages of a DPO

  • The amount of capital your company can raise in any 12-month period is limited by regulations.
  • Stock sold through a DPO is not freely traded so establishing a market price is difficult and may require regular valuations of company assets, both real and unrealized.
  • Administrative and legal requirements for creating and maintaining a DPO are significant and divert company resources from expansion initiatives. The costs of creating and staying in compliance with DPO regs may cost more than you have to pay for expansion capital.

    Talk to a tax attorney or your CFO about the costs of creating and maintaining a compliant DPO before taking this step and work those numbers over and over to create the best and worst case scenarios. This'll give you a clearer picture of the value of a DPO to your business short and long term.

  • Meeting state or SEC requirements can be difficult, time-consuming and expensive.
  • You may not be able to raise sufficient funds using a DPO.
  • Ownership in the company is diluted and spread over a larger number of people and entities.

Is A DPO In Your Company's Future?

Ask yourself a few key questions. First, do you need capital to finance expansion, growth, expanded staffing or research and development?

Are you prepared to commit time and money to completing a process that requires relatively sophisticated legal, accounting, and planning skills - including marketing and selling stock in your company?

Do you have access to individuals or investors who are interested or willing to invest capital in your business? Consider the companies with whom you do business, either as a buyer or seller of goods and services. Form a team in which the sum is greater than the individual parts of the business relationship, i.e. help your business associates grow and they'll help you grow.

Start with your company accountant and attorney in preparing a DPO. Describe your plans, your goals, and your intentions in a written statement. By writing it down, you're forced to create a plan on paper that can be implemented efficiently, saving time and money.

Your plan must also meet regulatory requirements and effectively market (sell) shares of stock in your company. Contact local investment bankers for leads and potential sources of investors. A DPO isn't easy, but it could be the ideal tool for your business to raise funds while avoiding the time and expense of an initial public offering, or the costs of borrowing expansion capital.

You can expand your team and your business with a DPO. Just make sure you've weighed all other avenues and that you're prepared for the expense and additional reporting requirements when you create a direct public offering.


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The information provided is not intended to be legal, tax, or financial advice or recommendations for any specific individual, business, or circumstance. TowneBank cannot guarantee that it is accurate, up to date, or appropriate for your situation. Financial calculators are provided for illustrative purposes only. You are encouraged to consult with a qualified attorney or financial advisor to understand how the law applies to your particular circumstances or for financial information specific to your personal or business situation.

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