BAJAJ BROKING
March 01, 2025
5 mins read
A direct public offering (DPO) allows a company to raise funds directly from the public without having to go through intermediaries like broker-dealers, investment banks, Read more..and underwriters. In a DPO, the issuer tends to totally eliminate intermediaries. Hence, DPO is a cheaper way to raise finance than an initial public offering (IPO), which involves intermediaries. Read less
Direct public offerings (DPO) are a common way for firms to raise capital for their needs. As the name suggests, in a DPO, a company directly issues securities to investors without getting intermediaries involved. If you are keen on this topic, read this blog, as it takes a deep dive into what a direct public offering is, how companies can raise capital through this route, and what makes a DPO different from an IPO.
A direct public offering or a DPO is a method to raise capital, wherein a company directly offers its securities to the public, thereby eliminating the need for intermediaries like broker-dealers, investment banks, and underwriters. Such intermediaries are extremely common in an initial public offering (IPO).
As an issuing company totally eliminates intermediaries from its offering, it considerably reduces its cost of raising capital. That said, an issuing company has to self underwrite its issue because of the absence of intermediaries. Typically, DPOs are preferred by small companies, as they do not have big budgets to raise capital like large companies.
In a direct public offering (DPO), an issuing company raises money itself without involving intermediaries. Hence, it does not have to deal with the typical restrictions, which are imposed by venture capitalists and banks in IPOs.
In the case of a DPO, an issuing company decides the terms of the offering, such as the price of an offer, the minimum investment for an investor to subscribe to an offer, any limits on the number of shares an investor can purchase, the offering period, the settlement date, etc.
If for a DPO, a significant number of shares have to be issued or time is extremely critical, the issuer may get a commission broker involved to sell a percentage of shares to his clients.
The amount of time required for a DPO varies from company to company. The entire process can take from a few days to a few months. While preparing for a DPO, a company issues an offering memorandum, which provides details about the issuer and also about the type of securities being issued.
Companies can use a DPO to issue many kinds of securities, including common shares, preference shares, and debt securities. An issuing company has to also think about the medium to market the securities, which can include magazine & newspaper ads, social media platforms, telemarketing campaigns, etc.
Then, an issuer has to file the required documents with regulators before it finally comes out with a DPO. These documents usually include the offering memorandum, financial statements, and articles of incorporation.
An issuing company makes a formal announcement of its DPO to the public after receiving an approval from regulators. After that, it begins to offer its securities for sale to investors, which may include its clients, employees, suppliers, distributors, even acquaintances. A DPO closes when its offering period comes to an end or when all the securities on offer have found buyers.
If a DPO specifies a minimum or maximum number of securities on offer, it will be cancelled if it does not receive the minimum number of orders. In case of such a cancellation, all the money received from investors has to be refunded. However, if a DPO receives more interest than the maximum number of securities on offer, the issuer either prorates shares among investors or uses a first-come basis to offer shares to investors.
The process of a DPO starts with an issuing company deciding the kind of securities it wants to offer to investors to raise capital. A company can issue various kinds of securities through a DPO, like common shares, debt securities, and preference shares.
After deciding what kind of securities it wants to offer, a company has to decide about the issue’s offer price, minimum & maximum investment, the settlement date, and the period of the DPO.
After making decisions about these factors, the issuer gets the documents ready to file them with the Securities and Exchange Board of India (SEBI) for approval. Once it receives the regulator’s nod, its DPO will be open to investment on the announced date.
Let us take a few examples to better understand the concept of direct public offering (DPO). Suppose there is a small company called ABC, which is doing well in its business but does not have enough funds to raise capital through an IPO. Hence, it decides to raise funds through a DPO.
Let us take the case of another company called XYZ, which comes out with an employee stock ownership plan (ESOP) for its employees. Once the vesting period is over, XYZ takes a decision to go public. But, it selects the DPO route so that it can directly list its shares, which will reduce its costs and provide more liquidity to its employees. After the direct listing is over, employees will be able to sell their shares.
DPOs can be an effective way, especially for small firms, to raise capital because they do not have the resources to get intermediaries involved. That said, DPOs are often not listed on a stock exchange. Hence, they are traded on over-the-counter (OTC) markets. Typically, companies use DPOs to raise money through trusted parties, like clients, employees, distributors, etc.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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A DPO allows an issuer to sell its securities directly to the public without getting intermediaries involved. However, an IPO requires an issuer to get intermediaries like investment banks involved to sell its securities.
DPOs mostly do not require an issuing company to hire intermediaries like broker-dealers, investment banks, and underwriters. Hence, DPOs help companies save funds and yet raise the required capital.
It may happen that a sufficient number of investors do not show interest in a company’s DPO. Hence, the company will not be able to raise the required capital. As no underwriters are involved in a DPO, a company may not be able to value its offering correctly.
A company has to meet certain regulatory requirements to raise money through a DPO. If it meets those requirements, it can do so. Otherwise, it cannot.
In a DPO, a company raises capital from investors directly without involving intermediaries. Hence, it takes decisions about the type of securities to be issued, the offer price, and the settlement date itself. Then, it has to file the necessary documents with regulators to get approval. After that, it can raise money through a DPO.
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