Direct Public Offerings: Benefits and Drawbacks
The direct public offering offers a relatively unique form of financing that are just starting to catch on with businesses and individual investors.
In a direct public offering, a business issues shares without the full cost of an IPO. Since direct loans are issued by public officers and directors, there are no insurers. Shares are directly sold to parties who may have an interest in the company, and buyers often customers, distributors, or employees.
For companies not yet large enough to benefit from an IPO, a direct public offering is an attractive alternative. Many consider the biggest advantage of a direct public bid with the fact that capital need not be repaid. Companies can give up a part of the company in exchange for the resources it needs. Often this means dilution obtained with much less than what could be expected with a venture capital firm.
In some cases a company may find it easier to raise money through a direct public offering than the traditional debt financing as a bank loan. This is particularly true for high-risk businesses with little physical capital that can be used as collateral. A direct public offering, the corporation can market themselves to those better able to understand and bear the risk.
Since investors have long haunted by the stories of those who invested at the beginning of successful companies, the direct sale of a public offer are relatively easy if the right audience is. Once that happens, the company can even get extra help in the form of contacts and encourage investors. This great interest in the success of the company can be an excellent off-the-books assets. The efforts of the prospecting for investors can be beneficial for the company. The campaign finance can double as advertising, creating a new public awareness of the company and its services.
Despite the obvious advantages, a direct public offering has some drawbacks. The process is not simple, and contains much information to gather to file a registration statement with the SEC to prepare. As with an IPO, a direct public offering can divert attention from the workers for many months. A company that is a short staff may find themselves in a state of chaos, where it is very important to make a good impression, unless a professional consultant to help them rent.
The process of preparing a direct public offering is less expensive than an initial public offering with an underwriter, but not much. Instead of spending money to underwriter’s commissions, some of that money should be diverted to marketing efforts. Since there is no underwriter, there is nobody else to help sell the properties. While some companies may seek the assistance of an investment bank, adds another cost to the process.
If a direct public offering remains attractive after careful examination of the advantages and disadvantages, it is a good idea to consult with an expert and experienced consultant, accountant or lawyer who is well versed in securities law. Some of the more conventional methods of financing may be more appropriate in a given scenario, so a professional can serve as a guide in the process.
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