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Getting Started on Direct Public Offerings

What it is: It’s selling stock -- ownership stakes in the company -- to investors. But unlike with an initial public offering (IPO), there is no investment bank, broker-dealer or stock market listing involved. You market directly to the prospective investors.

How it works: Direct public offerings (DPOs) typically raise less than $1 million, but sometimes raise as much as $25 million. [http://www.entrepreneur.com/encyclopedia/direct-public-offering-dpo] DPOs work best for established companies with a strong business plan and a group of loyal business partners, vendors, employees or customers eager to invest in the venture's success.

Under Rule 504 of the U.S. Securities and Exchange Commission's (SEC) Regulation D, you may not even have to register the offering or file reports with the SEC if less than $1 million is being raised -- or if investors are contained within the same state.

Upside: You can raise money from the public without the expensive and time-consuming registration and financial reporting that goes along with an initial public offering. Unlike an IPO, it is also possible to advertise and promote the stock sale. In fact, you need to advertise and promote the stock sale, because it is not getting rolled out on Wall Street.

Downside: The danger is that the costs of marketing a direct public offering to prospective investors could end up taking away from the money you raise. For example, Bank of America estimates that a direct public offering can cost anywhere from $50,000 to $125,000. Is it worth it to give up $125,000 and a piece of your company's ownership to raise $1 million?

Plus the securities are more illiquid than they are with an IPO. It will be hard for investors to find open markets or other individuals willing to take the stock off their hands if they want to sell it -- a situation that can make a DPO difficult to market.

A silver lining: Crowdfunding -- the process of soliciting a bunch of small donations (usually online) -- could make DPOs much easier to market, making them a more competitive fundraising option.

Related: Regulators Wrangle Over How to Protect Crowdfunding Investors

SEC rules for the next generation of crowdfunding could make the process even easier. 

Related: Crowdfunding Goes Mainstream: Why Donald Trump and Google Are Supporting Grassroots Financing

How to get started: Hire a certified public accountant to make sure you have financial reports and projections that follow generally accepted accounting principles, and find a seasoned securities lawyer and possibly a consultant to guide you through the process. Tap into your network and local small business advisors to find a good fit.

If your money-raise qualifies under Rule 504, you will only have to follow state securities regulations, the so-called “blue sky laws,” as well as file a short, after-the-fact Form D with SEC that publicly discloses basic details about the money-raise.

The North American Securities Administrators Association has more on how to qualify for Small Company Offering Registrations under Rule 504. 
 

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