In the wake of COVID-19 and its aftereffects, we don’t want small and midsize businesses to go away. We want them to stay, grow and hire. Small and medium size businesses provide the majority of our new American jobs. While the government has been supporting large companies, smaller companies are largely left to fend for themselves during economic downturns.
Going public through a Direct Public Offering or DPO creates that precious opportunity for working capital, when government resources and traditional funding do not. This is not a time for businesses to be afraid. Quite the contrary, it is a time to grow and scale your business. Some weaker companies who do not have access to capital and lack financial ingenuity will fail, creating an opportunity vacuum for other companies to gain market share. Access to capital is the deciding factor. It furthers growth and scalability during these times. The next five or six years there will be less competition in respective markets with amazing opportunity for surviving businesses to grow.
For businesses with an established financial track record for growth and a willingness to display financial and managerial transparency, bringing a business public through a Direct Public Offering is one path towards an infusion of working and growth capital, a potential wealth building asset, access to lines of equity, and a path towards retirement.
Conventional wisdom informs that taking a company public is reserved for large and well-connected businesses with established big bank relationships and plenty of capital in their coffers to front extensive underwriting, due diligence and presentation costs; enough to be perceived as a strong barrier to entry for most American businesses. When most business owners think of public companies, they think of Facebook, Exxon Mobil, Amazon, Walmart and Apple gracing their monthly investment portfolio statements. The aforementioned companies were brought public through a large bank and an Initial Public Offering or IPO.
The lesser known option for bringing a company public that doesn’t get as much glory and prestige in the media but does present a solid financial path towards growth is a Direct Public Offering or DPO.
The advantages of a DPO
According to ReferenceForBusiness.com, a Direct Public Offering “is a financial tool that enables a company to issue stock directly to investors without using a broker or underwriter as an intermediary.” A DPO helps to avoid many of the costs associated with “going public” through an Initial Public Offering.
DPOs are a form of exempt securities offering, which means that companies choosing this form of offering are exempt from many of the registration and reporting requirements of the Securities and Exchange Commission. This is a factor that has boosted the use of Direct Public Offerings in recent years. ReferenceForBusiness.com also states, “An estimated 200 small companies went public in the latter half of the 1990s via this route,” either by offering stock directly through their business’ online platform, through a Boutique DPO Consulting Firm or by listing with one of several online DPO forums.
Although many small businesses need the capital that an IPO can provide, they often lack the financial strength and reputation to appeal to a broad range of investors, a necessary ingredient for a successful IPO. For other small businesses, the loss of control, the strict reporting requirements, or the expense of staging an IPO are prohibitive factors.
DPOs are a private placement of stock. They provide small businesses with a quicker, less expensive way to raise capital through selling shares of stock in their business. The primary advantage of DPOs over IPOs is the dramatic reduction in cost. IPO underwriters typically charge a commission of 13% of the proceeds of the sale of securities, whereas the costs associated with a DPO are closer to 3%.
DPOs can also be completed within a shorter time frame and without extensive disclosure of confidential information. Since the stock sold through a DPO goes to a limited number of investors who tend to have a long-term orientation, there is often less pressure on the company’s management to deliver short-term results.
Direct Public Offerings can become indexed on trading platforms like the OTC Market and sometimes on NASDAQ and the NYSE, though at a lower tier to start, due to their lower price of their new stock.
Disadvantages to consider
Your raise is likely to be more modest than companies who raise capital through an IPO within the same 12-month period. A stock sold through a DPO is usually sold at a lower price than it might command through an IPO.
Many companies that go public through a DPO are too small to qualify for NASDAQ, but through a DPO, they can generate enough access to capital to grow into meeting the qualifications it will need to be listed on the NASDAQ or New York Stock Exchange upper tiers.
Why go public?
Taking your company public opens your company up to outside investors who are not founders, board members, or employees, enabling investors to buy into your company’s vision and monetary growth. In addition to the potential for a significant infusion of capital, this allows you and your employees an opportunity to hold stock that is pegged to monetary value and can be sold and liquidated for cash as needed to cover personal life expenses like college funds, medical emergencies and retirement plans.
You will enjoy shared ownership with investors who share in your vision. Taking your company public through a Direct Public Offering also allows you to map your exit strategy from the company. Rather than with a privately owned company that has to find qualified buyers for their business when an owner wants to retire, the founder or founders of a public company can simply sell 100% of their stock to make their exit towards retirement.
Understand: You no longer own 100% of your business
As a private owner, you own 100% of your company and you assume 100% of the risk. As a DPO publicly traded company, you own part of the company and only assume part of the risk through shared ownership. When a company goes public, they set aside a certain amount of shares to sell. If, as a private company, your stock was worth $1 per share and all of the owners and employees participate in this venture and own shares of stock, when the company goes public, they, of course, have the opportunity to sell some of the stock they own.
As an example, the company might go public at $5 a share, and if 15 million public shares are sold, this theoretically means that the company is going to raise $75 million. Although the initial shareholders might receive stock at a dollar, it may eventually go for between $7 and $10 per share, although there are no certainties that anyone will share in your vision. It is a calculated risk with tremendous potential for payout.
A majority shareholder owns 51% or more. Most founders do not own 51% or a controlling share of their company anymore, but are willing to sell majority shares in exchange for each share they do own being work much more than 100% of what their company was worth prior to taking their company public. As the old saying goes, it is better to own 20% of something than 100% of nothing. As founders or owners sell shares of their company, each share’s worth grows exponentially, allowing for a profitable cash out.
After years of bootstrapping, self-funding and delayed gratification, business owners can enjoy the payoff that comes from bringing their company public through a Direct Public Offering, allowing outside investors to fund the company’s innovation, growth, expansion of market share and eventual personal retirement. Selling your shares allows you to put money in the bank, pay off your home, add to a college fund and ultimately retire.
Solomon RC Ali Corporation scales profitable companies across healthcare, technology, and energy sectors through the acquisition of funding and management consulting. The firm has managed and closed more than $250 million in structured investment capital. Solomon RC Ali is also CEO of NDR Energy Group, one of the largest minority-owned energy companies in the U.S, and CEO of Revolutionary Concepts, holder of the technology patent licensed to Ring Smart Home Doorbells by Amazon. Solomon RC Ali is host of the podcast, MBA: Minority Business Access.