Going Public With a Direct Placement Offering -- Bruce E. Methven

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Going Public With a Direct Placement Offering =96 Bruce E. Methven

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Many companies do not realize it, but it=92s possible to make a public offe=
ring and be listed on the over-the-counter market even though the company i=
s small and not yet profitable.=20

When they hear =93going public,=94 most people think of initial public offe=
rings (IPO=92s).  These days an IPO requires that a company be profitable, =
takes perhaps two years to complete and costs a large amount of money.  Whi=
le an underwriter is involved with an IPO, for all but the hottest companie=
s the underwriter will not guarantee the offering but only agree to use bes=
t efforts to sell it.  Many best-efforts IPO=92s do not raise the minimum a=
mount of money required for the offering.

There is an alternative:  A federal direct placement offering or DPO.  Thes=
e do not involve an underwriter and are faster and less expensive than an I=
PO.   While the stock in a DPO does not wind up on the New York Stock Excha=
nge or NASDAQ (few companies can qualify for such listings anyway), a DPO c=
an be set up so that the company=92s stock is listed on the over-the-counte=
r (OTC) market and securities brokers can trade it for their clients.  (The=
 OTC markets have become more formalized over time.)  This is a huge plus i=
n that it a substantial amount of money can be raised and it gives investor=
s a market so they can sell when they want.=20

Federal Form S-1 is used for the offering, which involves registration (rat=
her than an exemption).  This means that the form must be submitted to the =
SEC (along with exhibits and financials) and the offering cannot begin unti=
l the SEC has approved it.  On the other hand, full public advertising is a=
llowed and there can be an unlimited number of non-accredited investors.=20

With a DPO there is no underwriter involved.  Instead, the offeror itself s=
ells the stock or a consortium of stock brokers sells the stock, often to i=
nvestors they already know.  Even if the minimum amount of money necessary =
for the offering isn=92t reached, the offeror still has a publicly traded c=
orporate shell that often can be sold for more than the cost of the offerin=
g.=20

Approval by the SEC of a DPO does not by itself list the securities on any =
over-the-counter platform.  That requires the additional steps of filing an=
 application with FINRA to obtain a trading symbol, getting approved for th=
e electronic exchange that stock brokers use, and filing for listing on the=
 over-the-counter markets.  FINRA requires that a company have at least 35 =
investors to obtain a trading symbol.=20

To raise the money for the cost of a DPO =96 and to get at least 35 investo=
rs -- many small companies conduct a federal Rule 506 offering first.=20

A DPO is not for every company, but given its strengths and the fact that t=
he requirements are substantially less than for an IPO, it is offering appr=
oach that companies should always keep in mind.

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--Bruce E. Methven

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The foregoing constitutes general information only and should not be relied=
 upon as legal advice.

You are welcome to copy and distribute this document for non-commercial pur=
poses, but it may not be edited and the prior warning and the following mus=
t be left on it:

Bruce E. Methven, 2232 Sixth Street Berkeley, CA 94710
Phone: (510) 649-4019; Fax: (510) 649-4024
www.TheCaliforniaSecuritiesAttorneys.com
CaliforniaSecuritiesAttorneys[at]gmail.com
Copyright 2013 Bruce E. Methven, All Rights Reserved.

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