What’s a DPO or DPL? Direct Listing vs IPO
When a company’s looking to raise capital, it typically has two ways to get the cash it needs. It can sell shares of its stock or borrow the money. If the company’s already in a decent amount of debt or doesn’t have the financial standing to go to a lender, it will often choose to sell its stock shares.
It’ll sell the shares through a direct public offering, or DPO, or an initial public offering, or IPO. A majority of companies choose to IPO to raise capital, creating new shares of stock that are underwritten and sold to the public. Other companies generate the cash they need through a DPO, where they sell existing, outstanding shares to the public with no underwriter involvement.
This guide will break down these two stock selling options and the pros and cons associated with each.
DPO vs. IPO: What’s the Difference?
Let’s start with the similarities: both a DPO and an IPO are ways for a company to raise the funds it needs. Both involve listing the shares that are to be sold to the public. The difference lies in where the shares are coming from.
Direct public offerings, also known as direct public listings, occur when the company is not creating any new shares to sell. Instead, a DPO involves selling shares that already exist directly to the public, without a large investment bank or broker underwriting the sale of the shares.
An initial public offering happens when a company decides to create new shares to sell. In this case, an underwriter gets hired to handle the process. The underwriter helps determine the price of the shares, buys those shares, and then sells them.
What Are the Pros and Cons of a DPO?
Here are some of the benefits and drawbacks of DPOs you should be aware of.
One of the main reasons companies choose to sell stock through a direct public offering to avoid having to create new shares.
- Each time new shares get created, the company gains more shareholders who don’t just own a portion of the company but also receive a slice of the company’s profits. To avoid losing ownership as well as money, selling existing shares transfers what has already been created.
- Another reason companies choose a DPO is that it’s a cheaper option. Because a DPO doesn’t require an underwriter, it costs less.
- An underwriter often charges about 5% of the share price for underwriting. While this may not add up to much with some shares, others might cost millions to underwrite.
There are a couple of downsides to DPOs, and it all boils down to the absence of an underwriter.
- Investment banks and financial institutions that act as underwriters may be costly, but they help ensure that federal regulations are followed. When a company chooses to raise cash through a DPO, its corporate team is responsible for making sure federal regulations are followed.
- An underwriter can also help a company sell shares quickly, especially if it’s well-established with a broad network of clients with all of the techniques needed in place to attract new ones.
Without that help, companies have to take care of this alone. If a company doesn’t have the proper network or channels to market its shares, it will have to wait for investors to buy them, and that could take a while. During this undetermined waiting period, the company won’t have access to the capital it’s looking to raise.
Pros and Cons of IPOs
Initial public offerings might cost more, but they also net the company the money it wants sooner.
Because the underwriter buys the shares, the company gets the cash immediately upon completion of contracts. This allows the company to put that money to work much more quickly, while the underwriter worries about selling the shares.
Not all underwriters offer the option to receive the funds upfront, though. This is evident in the three basic types of underwriting agreements:
3 Types of Underwriting Agreements
- A “bought deal,” where the underwriter buys the shares ahead of filing a preliminary prospectus.
- A “best effort deal,” where the underwriter promises to try its best to sell your shares. The bank or firm serving as the underwriter does not purchase anything and offers no guarantee other than its best efforts .
- An “All-or-None Agreement,” which means the deal is void if all shares are not sold.
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Only the first of these three agreements give the company the cash it wants immediately. The other two options involve waiting for the shares to be sold, much the same way a direct public listing does. The difference is that with a DPO, the company would keep all of the money.
These three agreement types show that the pros and cons of initial public offerings can vary and can work against the company’s timetable for raising the money it needs.
When choosing between a DPO and an IPO, there are advantages and disadvantages to both. The decision you make should directly involve your company’s goals and the reasons for selling shares in the first place. If you’re uncertain, speaking to a financial advisor is always the best option.
How Does An Underwriter Sell Shares?
Investment banks and other financial institutions that serve as underwriters already have a reputation and a network built to market particular stocks. They might use their own platforms or take your company’s shares on the road, pitching them at investment conferences and other events, for example.
For instance, you might have seen a show or movie where people interested in investing are invited to a dinner. At that dinner, the host introduces the investment option and gets the crowd interested. The host then paints the benefits of investing. This is a common practice in selling timeshares and other investment properties.
Typically, underwriters have techniques that work well in building their own businesses that they can use to sell your company’s DPO or IPO shares. As they usually already have access to a viable market, selling those shares can be easier for them than it might be for you.
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- Corporate Finance Institute. "Direct Listing - Overview, Pros & Cons, and Difference From IPOs."
- Investment U. "IPO Direct Listing vs. Traditional: Pros and Cons."