From the very beginning of the venture business in the form we are seeing now, the IPO (initial public offering) has been a breath of fresh air for startups of all kinds. However, conducting an IPO of securities is popular, but not the only way to turn a company into a truly public one. We are talking about direct public offering (DPO).
However, before proceeding to review the differences between direct public offering and IPO, it is necessary to note their similarities. First of all, the procedures are similar in that they are both a way for a private company to go public and start selling shares on the open market. And whichever of them is conducted, the company will still comply with all financial and other reporting requirements for public companies.
IPO in Action
When a large company prepares to go public and conduct an IPO (initial public offering), it issues new securities, which will then be sold. If sales go badly and the value of shares falls, all the company's capital is eroded: there are more securities, and it is not possible to attract an equivalent amount of funds. Therefore, to reduce the risks, the company turns to underwriters - banks that are ready to act as a guarantor of the sale of its shares. For underwriters, the emergence of new companies on the stock exchange is one of the main ways to make money on commissions. They buy their own shares from a listed company and then resell them to investors and receive a commission. They prepare IPOs, conduct analyzes, assign the value of one share and at the same time communicate with a large number of potential investors, trying to gain their financial participation. This is the initial public offering, after which the securities are freely floating on the stock exchange.
IPO and DPO: What's The Difference
Direct public offering is arranged differently.
Unlike an IPO, in a direct public offering, the company does not create shares for sale, but existing shareholders sell some of their shares simply by trading on the stock exchange. At the same time, both in listing and in IPOs, the company creates a public market for trading its shares, providing a basis for liquidity.
In the case of DPO, the company does not use the services of underwriting banks and does not hold road shows for investors, the purpose of which is to explain why it is profitable to buy securities of this particular issuer. Therefore, in order to conduct a direct listing, a company must be well known to investors so that it does not have to understand its business.
Under DPO, the company does not issue new shares. The securities held by the current shareholders go on sale. The value of such shares is determined by the market: they do not have a starting price at which they begin to trade. This saves the company and gives it independence, but increases the risks.
Advantages of Direct Public Offering
The most attractive feature of direct public offering is its cost.
The nature of the IPO is that the bank acts as a reseller, trying to lower the price for the purchase of shares in order to resell them at a higher price. Interestingly, the initial and final value of shares after repurchase may differ by 30% or more.
In the case of direct public offering, you do not need to pay for underwriting, as it simply does not exist. Shareholders interested in offering their shares sell them directly to the final buyer. In this case, a field with shares is formed, to which everyone can access. The availability of shares depends on the decision of shareholders (shareholders), and the price - on market demand. This makes direct public offering a riskier way than an IPO, as market fluctuations can be observed.
In addition, the nature of the marketing process for direct public offering is also different: the cost will be much less. Finally, the initial and final value of shares rarely differs greatly.
In fact, direct public offering of securities in the United States or another country is usually a more profitable solution than IPO.
Of course, as for investment banks, for them direct public offering will seem to be a problem for making money. Not surprisingly, the investment banking community is not happy with it. This should be taken into account, as large banks trading in secondary markets are able to influence and influence the perception of certain companies by the public and, consequently, the interest of investors in these companies.
Be that as it may, the advantages of conducting direct public offering, even taking into account the biased attitude of the banks, are significant and can outweigh other disadvantages. It is logical to assume that most companies that are interested in liquidity and that are interested in differences in the ways of public offering of shares will most likely prefer to save when getting the same result. However, most often it turns out that companies choose to conduct the procedure of initial public offering of securities. Why this is so, let's try to understand further.
The main reason why most likely direct public offering has not gained such popularity is the nature of the current market. For more than 50 years, the vast majority of venture companies that want to sell shares have done so in the context of raising capital and creating a public market. When a company considers raising capital in a business as part of a stock transaction, direct public offering is, so to speak, ineffective, at least for now.
However, in the current era of so-called "unicorns", there are many companies interested in creating a public stock market to provide liquidity to assets, but do not need capital. Characteristically, these companies usually work longer than their IPO counterparts, have more customers, are more successful and more popular with people. And all this plays into their hands, as there is no special need to do sweeping advertising for future offer of shares.
The reason for the main constraint in offering shares by conducting direct public offering, such a complex, is the desire of people not to attract too much attention. This means that the question for them is whether direct listing reflects generally accepted norms, or, at least, is not something unique, or whether it is some kind of deviation from the norm.
Apparently, the phenomenon of direct public offering is unlikely to be stopped by banks, no matter how hard they try. However, the direct listing procedure is also unlikely to become popular in the foreseeable future. If only, the procedure will not turn into something more complicated, attaching the opportunity to raise capital for companies.
The Final Word
An initial public offering of shares is not the only way to make a company public, but it is extremely popular. Therefore, before deciding to offer shares, it is necessary to get acquainted with all possible ways to solve this problem. And for all the events to go as planned, it would be advisable to provide reliable support.
Please note that all material presented above is for informational purposes only and should not be construed as advice. If the reader has any questions directly related to the topic of the article, there is an opportunity to analyze them and outline ways to solve them together with YB Case during consultation on IPOs and direct public offering of securities.
To order a consultation on the IPO of securities, and also to learn more detailed information on services of our company, please contact us directly using the form below.