Be Your Own Broker with Direct Public Offerings (DPOs)

Historically, small companies have had a difficult time finding capital to expand their businesses. Traditional lenders are frequently unwilling to take risks with untried companies. Venture capitalists negotiate tough deals that often force company founders out of key management roles. And traditional IPOs require a minimum of $15 million in annual revenue.

If you take an initial public offering (IPO) and cut out the underwriter, what you have left is a direct public offering (DPO). Direct public offerings (DPOs) are defined as the direct sale of shares in a company to individual investors. DPOs have been around for more than 20 years. For example, Ben & Jerry’s used a DPO to raise capital for the ice cream company. However, the offering was limited to investors from its home state of Vermont.

In October 1995, the SEC fueled DPOs with a ruling that makes electronic delivery of a prospectus acceptable. Consequently, companies can raise needed capital by selling their shares directly to the public via the Internet. These DPOs have the following advantages for small companies:

Cost and time savings: The company saves thousands of dollars in underwriting expenses.

Regulation of Internet IPOs: Issuers can file faster, turnaround times are quicker, filing is less expensive, the sales process carries fewer restric tions, and issuers can announce planned offerings.

Management remains focused: Management isn’t drawn away from the company’s day-to-day business needs and customers.

Investors can get in really early: Investors have access to venture capital types of investments.

No broker commissions: Investors don’t have to pay high broker commissions.

Recognizing the limitations of DPOs

Many companies are offering DPOs instead of initial public offerings (IPOs). For many online investors, a DPO is the best way to get in on the ground floor and share in a company’s success. Investors can purchase shares directly from the companies that they want to be part owners of. However, DPOs have some limitations:

Blue sky laws: Issuing companies must be registered with the SEC and in the states in which they offer securities, but new legislation allows companies to use the Internet to present direct public offerings. This new legislation is inconsistent with regulations passed in 1911. The 1911 rule requires issuers to register in the states in which they offer stocks, but the Internet has no boundaries and thus offers worldwide distribu tion of stock offerings. Does this mean that issuers have to register in each state that uses the Internet? Some issuers register in all 50 states before offering shares. However, one state, Pennsylvania, only requires companies to clearly indicate where they’re registered and who may purchase securities.

Fraud and abuse: Stock issues are highly regulated, but the Internet is an unregulated environment. The enforcement of registration issues on the Internet is keeping the SEC more than busy. The result may be fraud ulent solicitations on the Internet.

Buying DPOs

DPO issues often open in a blaze of glory due to strong public interest. Then the share prices settle down to a consistent trading range. During the stock’s initial period of volatility, the stock price may double or triple. Cashing in at this point can be very profitable and may compensate you for earlier invest ment mistakes.

DPOs are speculative and definitely for aggressive investors. In other words, if you can’t afford to lose all your investment, you shouldn’t be in this market. That said, even the most aggressive investors should invest only between 5 and 10 percent of their total portfolio in this type of financial asset.

To purchase shares, obtain a subscription agreement for the DPO. The sub scription agreements are usually included in the last page of the prospectus. If you can’t find the form, request one by e-mail or through the U.S. mail. Send the completed agreement and a check for the appropriate amount to the company. The company sends a confirmation letter within five days and the stock certificate within 30 days. (I suggest making a duplicate copy of your check and subscription agreement for your records and sending the originals by registered mail.)