DPO Frequently Asked Questions

What Are DPO's and What Makes Them Attractive?

The Direct Public Offering (DPO) is a method for a company to raise capital. As in the more common Initial Public Offering (IPO), the company can advertise and issue stock for sale to the public. An IPO is handled by an underwriter or investment banker who buys all the stock and resells it on the open market through a stock exchange listing, usually at considerable expense. With a DPO a small company can sell stock to the public without having to go through such a process.

DPO's are a stock offering method approved by the SEC to (1) make it easier for small businesses to obtain financing and (2) to make it possible for investors to participate in the growth of small companies which sell their stock directly to the public without intermediaries. This is a significant alternative because the savings involved can translate into increased profits for both issuers and investors.

Because DPO's have generally not been effectively executed, their potential has yet to be realized, but the rapid changes that are now affecting finance and investment due to globalization and the Internet will make this a lucrative field for early innovators.

With proper preparation and follow-through DPO's can be very attractive because of the cost-savings involved and the level of control that is available to the small business and possibly to investors as well.

DSI is the premier company providing DPO preparation and marketing services on the Internet. To review a summary of our services, click here.

What can you tell us about the background and history of DPO's?

Small businesses were not able to access the public financial market until fairly recently. Because IPOs require a difficult and extensive registration compliance, and because the cost associated with the process are prohibitively high -- 5 to 10% of the amount raised -- entrepreneurs were not able to access public capital. In the case of IPO's, when a company becomes publicly traded, it also becomes a reporting company. That, in addition to other requirements of the Securities and Exchange Commission (SEC), increased the administrative costs of the issuer. DPO's do not have the same types of costs associated with them.

Direct Public Offerings have existed for more than two decades. However, such offerings have usually been limited to the state in which the corporation was based, and only companies with strong affinity groups (potential customers and investors) were able to successfully complete their offerings.

The process of simplifying public stock offerings for small businesses began after Congress passed the Small Business Investment Incentive Act of 1980. Unfortunately, government agency response to compy with this directive at both the federal and state levels has not been forthcoming.

What are the state and federal government considerations that need to be taken into account?

As the historical federal regulator of public offering activities, the SEC allows individual states to regulate securities offerings under $1 million. State regulatory agencies enacted a variety of rules and exemptions to help small businesses raise capital on their own. The program instituted by Washington State was so successful that in 1989, the North American Securities Administrators Association (NASAA) adopted a version that all states could use. This model, the Small Corporate Offering Registration (SCOR) has been adopted by all but two states as of Spring 1998.

The last major problem associated with being public for a company was the reporting requirements. In 1992, the SEC 's Small Business Initiatives simplified the reporting rules and reduced the costs of compliance with federal securities laws. The following changes took place:

Rule 504b(1) -- part of SCOR's Regulation D -- was amended. The revised regulation removed restrictions on general solicitation and on the resale of securities sold in these offerings. Under the SCOR program, an issuer can now conduct an interstate offering of non-restricted securities. The ceiling for public offerings under Regulation A was raised from $1.5 million to $5 million. It also provided for an alternative disclosure document. Regulation S-B, a new integrated registration and reporting system, was developed by the SEC. Under this system Form SB-1 permits registration of up to $10 million, and Form SB-2 permits unlimited registration.

Why is the relevance of the Internet on marketing and trading of DPO stock?

With respect to stock trading, In 1995 the Pacific Stock Exchange received approval from the SEC to list SCOR and Reg. A securities. This was designed to create a market for SCOR and Reg. A securities and provided liquidity to shareholders. At the same time, the Internet emerged as an attractive tool to market these offerings. The Internet enables companies to build and communicate with affinity groups faster and more efficiently, thus increasing the potential demand for their offerings.

Within the United States, there are 50 different state regulations controlling offerings, as well as different rules in the District of Columbia, plus federal and possibly other requirements. Traditionally, an offer or sale couldn't be made in a jurisdiction where it wasn't qualified or exempt. Since the Internet reaches everywhere, this becomes a problem. Fortunately, the state regulatory bodies are generally allowing the offering to include disclaimer language such as "This is not an offer in any jurisdiction where it has not been qualified. No sale may be made in any state unless pursuant to qualifications or an exemption from qualification." Thus, an offer within the state of California may be placed on the Internet without instantly breaking the law in New York.

Another innovation deals with the prospectus. The prospectus, which describes the offering, must be distributed to every potential investor. This many faceted document may now be placed online to be downloaded by any prospective investor, as long as the electronic version is the same as the print version. Companies are casting their prospectus in HTML or Adobe Acrobat format and saving an enormous amount on printing and mailing costs.

Finally, there are obvious marketing advantages when using the Internet. The same low publication costs that apply to the prospectus hold true for product catalogs, press releases, recruitment, and other information. Promotional material may be targeted to specific audiences with great precision.

What are the benefits of doing a DPO?

A company issuing a DPO is adding equity by attracting new shareholders from among the public. For several reasons, the DPO is an increasingly popular choice for growth oriented micro- and small businesses:

IPO underwriters are seldom interested in offerings under $5 million

A DPO is less costly to the company than an IPO

The regulatory burden is very modest for DPOs under Regulation A

The SEC has encouraged the use of the Internet for DPO's

Traditionally, when a small growth company has the good fortune of attracting venture capital, the VC firm typically asks for control and/or substantial amounts of equity. In some cases, the entrepreneur loses control of his or her company and can be removed. The Direct Public Offering is a strong alternative to IPOs and venture capital. DPOs enable entrepreneurs leading aggressive companies to raise the capital that they need without losing control of their corporations. Moreover, the costs associated with a DPO are far more manageable and realistic.

For investors, it is also an attractive investment alternative. Rarely do investors have access to venture capital investments; thus, they have no access to the rates of return that those investments can bring. The DPO method is therefore beneficial for both entrepreneurs and investors.

How much funding can you obtain with a DPO?

In theory a company can raise rather large amounts using direct public offerings up to $25 million with an SB2. However, such an offering is for the moment impractical because of the organizational limitations involved in achieving that level of stock sales.

On a practical basis companies can expect to be successful in completing SCOR (Reg D) and Reg A direct public offerings.

Currently, the upper limits which can be raised using various forms of the Direct Public Offering are:

SCOR (Reg D) -- $1 Million

Regulation A -- $5 Million

SB1 -- $10 Million

SB2 -- $25 Million

How much does it cost to complete a success DPO?

There are of course no guarantees that a company can successfully complete a DPO. However, properly positioned and with the right kind of preparation and marketing, almost any business can undertake a DPO and succeed.

Because a company doing a DPO can advertise, finding prospective investors is easier than doing a private placement. Those prospects have got to be turned into investors and that takes a lot of planning and work. An IPO can cost between $200,000 and $1 Million, or much more, depending on the amoung being raised.

By comparison, accumulated expenses in the $50,000 to $125,000 range to organize, launch and market a DPO is relatively inexpensive.

DSI has developed a unique boot-strapping, phased funding system that makes it possible to start the process of doing a DPO with as little as $2,500 in initial funds!

The final out-of-pocket cost will be determined from how much work is done in-house and how much is accomplished by outside sources. For example, preparation of the prospectus is a combination of business plan writing to present the business in the best light for prospective investors while simultaneously following the government’s guidelines on objective, full disclosure—two conflicting concepts.

Attorney’s and Accountant’s fees are also a necessity, the level of each depending on how proficient you have been with the preparation work. Marketing and promotion expenses can consume a lot or a little, depending on how extensively the DPO needs to be marketed, how large the offering is, and how quickly the company wishes to raise the funds.

A DPO is certainly not free, but it does cost far less than an IPO.

What is needed to get ready for a filing?

The rationale behind a DPO is that the business can reduce many of the overhead costs associated with the process and therefore maximize its efforts to raise capital. In this regard, both Federal and State regulators have attempted to keep processing, disclosure and reporting requirements as simple as possible without compromising their need to protect the public. However, the process still involves knowledge and skills which are not routinely found inside a small business. Each company, therefore, needs to decide which tasks it can take on itself and which will require professional assistance.

NOTE: Bulleted items represent services provided by DSI.

Preparation of the Prospectus. The official offering document is called the Prospectus and is included in the registration statement filed with the SEC. It is very comprehensive in terms of disclosure of the company’s background and history, management, marketing strategy, financial statements and projections, use of proceeds, etc.

Reporting and Disclosure. Care needs to be taken to include all of the reporting and disclosure requirements with the offering. Failure to follow proper procedures may put the offering in violation of state or federal law and may invalidate the offering.

States’ Regulatory Issues. Your DPO must be registered in each state in which you wish to sell stock. While most states accept a form U-7 for the filing, many states have differing and/or additional regulations and filing fee structures, e.g., the number of shareholders who may participate and the amounts they may invest, etc.

Subscription Agent. You may need a subscription agent to certify that you are complying with varying state restrictions. While this task can be performed by the issuer, care needs to be taken to avoid penalties which may be assessed for failure to comply or keep adequate records. Penalties could include the return a potential investor's check.
Accounting. Depending on the type of offering, an audited financial statement may be required. Any licensed CPA can perform this task.

Attorney. Familiarity with SEC and State regulations about public offering disclosure and reporting is not common to all attorneys. It is likely that an attorney with some special knowledge will need to be retained in order to complete an offering which is in full compliance.

Financial Printing. There are certain document requirements for the offering. For example, the printing, inventory and delivery of stock certificates; safeguarding unissued certificates, etc.

What Is Actually Needed to Market a DPO Effectively?

DSI and its partners can develop and implement a comprehensive marketing program to provide DSI clients with an optimal, least-cost approach to prepare and complete a direct public offering. Our program covers the following elements:

Promotion and Advertising. There are both Federal and State rules and regulations that govern how you can promote your offering. There are specific rules regarding what may or may not be said or done through any medium, including the Internet.

On-line Marketing Assessment. Short-term and long-term strategies need to be developed relative to the company’s DPO marketing plan and its relationship with the overall growth strategy. Target audiences need to be identified, located and their level of appropriateness measured against the company’s goals.

A Common Mistake about Web Presence. Obviously, a well organized web site is necessary to market your company and DPO on the Internet. However, a web site alone is a passive medium. An organized, pro-active marketing effort needs to be planned and implemented to integrate and support all marketing efforts with the web site.

On-line Marketing Implementation. There is a need to establish a marketing communications program to promote the DPO to affinity groups and speculative investors. This takes many forms, including the maintenance of newsletters and discussion groups, a public relations program, electronic mail, web promotion and advertising, on-line chat, and audio and video presentation.

Off-line Marketing Implementation. Integrating on-line and off-line efforts is critical to a successful DPO marketing effort. While the Internet is an innovative and cost effective medium, it does not replace traditional methodology. Consideration should be given to print advertising and distribution, partnering programs, web site integration, direct mail, and alternative forms of direct contact with affinity groups.

What Else Needs to Be Consider to Maintain an Effective Public Offering Status?

Transfer Agent. This need is probably not significant in the early stages, but if the issuer anticipates selling a substantial number of shares, the services of a transfer agent are well worth it. You will need to know about SEC rules and regulations that apply to transfer agents and the tasks performed.

Investor Relations. The marketing of your product or service is not the same as marketing your stock for sale to investors. There is also a difference between Public Relations and Investor Relations and not all PR firms understand both. You will need to ensure that your shareholders are kept informed about the company using a variety of techniques.

Bulletin Board-type Online Trading System. Having the ability to sell shares to the public does not imply there is a market for the continued buying and selling of those shares. "Making a market" to facilitate the independent trading of a registered security is still the realm of Underwriters. Many companies therefore believe that offering shareholders the ability to buy and sell their shares adds an element of liquidity to ownership, and therefore improves the prospects of selling the initial shares.

Can You Provide a Summary of DSI's Services?

Develop and coordinate the DPO prospectus including all offering documents

Prepare and register individual state filings

Develop Internet and Offline marketing assessment

Web site evaluation and recommendations

Electronic outreach marketing communication program

Develop Internet bulletin board trading system

Develop and implement corporate identity and public relations program

Design, create and publish newsletters

Develop and implement electronic mail and discussion group program

Write press releases and ghostwrite articles

Manage on-going media relations campaign

Assistance with the development of business plans

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