What it means
In a traditional share sale, an investment bank agrees to buy the securities and resell them to investors, taking a fee that is often a meaningful slice of the money raised. In a direct public offering, the company skips that step and offers its securities to the public itself, typically through a document filed with the securities regulator and through its own website or events.
The attraction is cost and control. The company keeps the fee that would have gone to the bank, and it can choose to sell to people who already like the business, such as loyal customers, suppliers or members of a local community.
That can turn buyers into advocates as well as shareholders. The trade-off is risk and reach.
With no underwriter guaranteeing the sale, the company bears the risk that the offering raises less than hoped, and it has to build its own investor audience. Direct public offerings are therefore more common among smaller consumer brands, community-owned businesses and early-stage companies than among large corporations.
The regulatory side is important. The company must still follow securities laws on disclosure, which means a prospectus or offering statement that describes the business, its risks and how the money will be used.
Rules differ by country and by the size of the raise, so legal advice is usually needed even when no bank is involved. A nuance is that the term should not be confused with a direct listing, where an already established company lists existing shares on an exchange without selling new ones through underwriters.
A direct public offering is about raising money from the public in the first place.
In practice
Real-world examples.
Example
A community-owned grocery cooperative needs $1,500,000 to open a second store. It offers shares to local residents at $500 each through public meetings and its website. Hundreds of customers invest, and the cooperative avoids paying an investment bank.
Example
A regional ice cream maker sells bonds to its fans to fund a new factory. The offering statement explains the interest rate, the maturity date and the risks. Investors receive their interest partly in cash and partly in product coupons.
Example
A technology start-up with a loyal user base lists an offering on its own investor page and accepts investments from members of the public. It raises less than a bank-led round would have, but it gains thousands of shareholders who also promote the product.
Formula
Calculation
Net proceeds = (shares sold x offer price) - offering costs
A craft brewery offers 200,000 shares at $10.00 each directly to customers and sells all of them, so the gross proceeds are 200,000 x $10 = $2,000,000. Legal, filing and marketing costs total $110,000. Net proceeds = $2,000,000 - $110,000 = $1,890,000. If an underwriter had charged 7% of gross proceeds, the fee alone would have been $2,000,000 x 0.07 = $140,000, so the direct route cost $30,000 less in total, before counting the extra time spent by the founders.Case study
Seen in the real world.
Tidewater Organics is an illustrative, fictional farm-to-table food company that wanted $3,000,000 to build a processing plant. Two investment banks quoted fees of 6% to 8% and suggested a minimum raise of $10,000,000, which was more than the plant required.
The founders instead prepared an offering document with their lawyers, spent $150,000 on legal and marketing costs, and sold shares to customers and local investors over nine months. They raised $2,600,000, which was 87% of target, so they financed the remaining $400,000 with a bank loan.
The outcome was mixed. The company paid less in fees than it would have paid a bank, but the long fundraising period delayed the plant by two quarters, and the illustrative lesson is that a direct offering swaps fee savings for time and effort.
Watch out
Common mistakes.
- Assuming that skipping the investment bank means skipping securities regulation, when the company must still make full and fair disclosure to investors.
- Counting only the avoided underwriting fee as the saving, and forgetting the staff time, legal costs and slower pace of selling shares directly.
- Confusing a direct public offering with a direct listing, when one raises new money from the public and the other simply lists existing shares.
Questions
People also ask.
Who can run a direct public offering?
Any company that meets the disclosure and eligibility rules of its securities regulator can do so, though smaller and consumer-facing businesses use it most often.
Is the money raised guaranteed?
No. Without an underwriter, the company bears the risk that it sells fewer securities than planned.
Can the shares be traded afterwards?
Not always. Many direct public offering shares are not listed on an exchange, so investors may find it harder to sell and should plan to hold for a long time.
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