What is DPO and How is it Different from IPO

Companies often require additional funds to support their expansion and operational needs. When seeking capital, businesses typically have two primary options: debt financing and equity financing. However, if a company has already secured substantial funds through debt, the remaining option is to generate capital by selling its shares.

If a company opts to raise funds by offering its shares to the public, it can do so through either a Direct Public Offering (DPO) or an Initial Public Offering (IPO). Although both methods serve the same fundamental purpose, raising capital, they vary considerably in their processes and requirements.

This article explores DPO and IPO in detail and highlights their key differences.

What is a Direct Public Offering (DPO)?

DPO, or Direct Public Offering, is when companies raise capital by selling existing shares directly to the public without intermediaries such as investment banks, underwriters, or broker-dealers. Also known as direct placement, DPO is usually preferred by small-sized companies as it helps cut down the cost of raising capital.

Understanding the DPO Process

A company may select a DPO over an IPO to raise capital when it lacks the financial means to cover intermediary costs. In a DPO, shares are sold directly to the public, giving the company full control over the offering’s terms. The firm sets the share price, defines purchase limits per investor, and determines the offering timeline.

Advantages of a DPO

• Allows shareholders to liquidate their holdings by selling shares directly in the market.
• Minimises expenses by eliminating intermediaries.
• It involves a faster process than an IPO.
• Maintains confidentiality as companies are not required to disclose sensitive information.

Disadvantages of a DPO

• Limited ability to raise funds within 12 months.
• Can be more volatile than an IPO due to price fluctuations.

What is an Initial Public Offering (IPO)?

An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time, transitioning into a publicly traded entity. This process involves underwriters, who assist in registering and distributing shares to investors. Many companies opt for an IPO to raise funds for expansion, research, debt repayment, and liquidity.

How Does an IPO Work?

Startups and bootstrapped companies that have performed well for years often choose IPOs to raise capital. The company works with underwriters who help register the securities, set the offering price, and market the shares to institutional and retail investors. Brokers and investment banks may also sell securities to the public.

Advantages of an IPO

• A traditional and well-established method for raising funds.
• Enhances a company’s credibility and public image.
• It lowers the total cost of capital because banks have high loan interest rates.
• Expands the company’s equity base.

Disadvantages of an IPO

• Companies must disclose sensitive financial and operational information.
• Information that is made public may be abused by rivals.
• Increased risk due to market volatility.
• Requires significant management attention and effort.

Key Differences Between DPO and IPO

When companies seek to go public, they typically choose between a Direct Public Offering (DPO) and an Initial Public Offering (IPO). While both methods allow businesses to sell shares to the public, they serve different purposes, involve varying costs, and have distinct impacts on market volatility and investor confidence. Here are the key differences between DPO and IPO:

1. Objective and Focus

Companies opting for an IPO focus on raising new capital, while DPOs primarily provide liquidity to existing shareholders rather than issuing new shares. IPOs are often preferred by companies seeking significant expansion, whereas DPOs suit businesses looking for a streamlined listing process.

2. Associated Costs

DPOs are more cost-effective as they eliminate intermediaries. IPOs involve underwriting fees and substantial administrative costs. Additionally, marketing and roadshow expenses further increase the overall cost of an IPO compared to a DPO.

3. Market Volatility

Since IPO share prices are negotiated before listing, they tend to be less volatile. In contrast, DPOs can experience higher price fluctuations since companies set their offering prices. Market demand directly influences DPO stock prices, leading to unpredictable valuation swings post-listing.

4. Ideal Candidates

A DPO is more suitable for companies with a strong reputation among their customers. Since no underwriters are involved, investors must trust the company’s business model before purchasing shares. IPOs, on the other hand, involve financial institutions that enhance investor confidence.

5. Lock-up Restrictions

A lock-up period prevents current shareholders from selling their shares immediately after an IPO, ensuring the stock price remains stable. A DPO eliminates the need for a lock-up period because only current shareholders sell shares directly to the public.

6. Process Duration

An IPO is a lengthy process that can take over a year due to extensive documentation, regulatory approvals, and marketing efforts. DPOs, in contrast, require less preparation and can be completed within a few months.

Conclusion

While DPOs and IPOs are both methods of raising capital, they cater to different company needs. IPOs involve underwriters and are ideal for large companies seeking substantial funding. DPOs, being more cost-effective, are suitable for smaller firms aiming to offer shares directly to the public. Both approaches have distinct advantages and challenges, making it essential for businesses to carefully evaluate their goals before choosing a public offering method.

Frequently Asked Questions (FAQs)

1. Can a company switch from a DPO to an IPO later?

Yes, a company can start with a DPO and later choose an IPO if it needs more funds and wants to attract bigger investors.

2. Which is better for startups—DPO or IPO?

A DPO is better for startups with a strong customer base and limited funding needs. An IPO is good for companies looking to raise large amounts of money and gain more visibility.

3. Do DPOs have the same rules as IPOs?

No, DPOs have fewer regulations than IPOs, but they still need to follow legal and financial rules.

4. Can any company do a DPO?

Not all companies are suited for a DPO. It works best for businesses with strong customer trust and a clear business model.