What is a Direct Public Offering?

A direct public offering is an offering stock by a company directly to its customers, employees, family members, friends, and perhaps others who have close connections to the company. A direct public offering usually raises substantially less money that a broader initial public offering. However, it has the advantage of also costing substantially less money.

A direct public offering is often used by companies when they initially decide they want to issue shares of stock. It is considered an easy way of financing a startup company. Many friends and families may be willing to help. Likewise employees and customers who truly believe in the value of the company may also be willing to invest.

Further, some may use a direct public offering as a marketing tool, depending on how many shares of stock they sell. If someone is invested in a company, they become tied to that company and have an ongoing interest in that company's success. Therefore, they are likely to become repeat customers throughout the future years. The more investors a company gets, the more repeat customers it is likely to have.

In the United States, those undertaking a direct public offering must register with the state-level version of the Securities and Exchange Commission in their respective states. This may not be what it is called in every state, but the function is primarily the same. While this will involve cost and paperwork, it will require substantially less of both than a full public offering.

Businesses considering a direct public offering also can look for a number of other advantages. For example, it is a good way to raise capital in a way that does not have to be paid back, such as a loan or bond. Further, because a direct public offering usually requires some sort of marketing technique, it gives companies a good opportunity to assess their marketing skills. If successful, a direct public offering may help business owners assess what they will need to offer a more general stock offering to the public.

However, there are also a number of disadvantages associated with a direct public offering. For example, asking friends and family to invest in a company that may or may not be successful could lead to some rocky relationships, in the event of a failure. Further, there is a chance that a direct public offering may not raise the capital desired and much time and money may be spent on a venture that is ultimately unsuccessful.