Questions and Answers

What is an Initial Public Offering (IPO)?

In an Initial Public Offering (IPO), a private company sells a portion of the company to the public markets in the form of shares. Companies do this for various reasons. The most common reason is expansion. With the money raised by selling part of a company which would otherwise be private, that company has currency to expand either internally or through mergers or acquisitions. Insiders find it advantageous when their company goes public because they have a publicly trading vehicle that provides them with liquidity. However, they then have restricted stock under Rule 144 which prohibits them from selling for one or two years after going public. Public companies have a responsibility to answer to shareholders and have stringent reporting requirements including audited financial statements. Public companies usually command larger market valuations than similar private companies. Many companies going public today are technology related as there is clearly a revolution going on through increasing popularity of the internet. IPO investors who were fortunate enough to invest in companies like America on Line, Yahoo, Amazon and eBay are up thousands of percentage points on their original investments. Although IPO offerings are still the most popular way of going public, they are used less and less as they can be expensive, costing upwards of several hundred thousand dollars. Ten to fifteen percent of the money raised in these offerings goes to the underwriter. Often the entire process can take six to twelve months to successfully complete.

What is a Direct Public Offering (DPO)?

A Direct Public Offering (DPO) is an Initial Public Offering in which the shares are sold directly to the public over the internet or directly through the company instead of being underwritten through a brokerage firm first and then sold directly to the public. The advantage with a DPO is that when shares are sold in this manner, without the use of investment banks and brokerage firms, a company is usually able to save a tremendous amount of money in fees, commissions, advertising, and printing costs. In addition, a company can obtain a market valuation more in line with its true value and does not have to factor in the underwriter’s fees. Retail investors get the opportunity to invest in a ground floor stock offering, unlike IPOs, which are done through underwriters who give favorite clients allocated shares. The DPO has recently started to become popular. No longer must a company spend thousands or millions of dollars to market an offering to brokers and investment bankers. Now, with the use of the internet, a company can easily sell all its shares directly to the public quickly and easily. However, be careful when investing in these types of offerings since they can be extremely risky. DPOs allow companies to raise equity financing when otherwise not possible, while at the same time offering investors the opportunity to invest in early stage companies typically dominated by venture capital firms and private investors.

What is a Private Placement?

A Private Placement is a private offering that is generally available to accredited investors. Usually, only 35 non-accredited investors are allowed to invest. Typically this type of offering will raise several hundred thousand to several million dollars in capital. Private Placements are generally used by early stage companies looking for seed money or expansion capital. They are generally used to prepare a company for a larger offering down the road. This type of offering is even riskier than IPOs and DPOs because there is generally no public market for these securities until the company does an IPO or DPO and lists its stock on one or more of the public stock exchanges. The upside potential here is that these investments tend to be among the most lucrative in the world as you are getting the opportunity get in on the ground floor before the company goes public.

What is an Accredited Investor?

An Accredited Investor is defined as a natural person, where the term “natural person” is used to refer to a real person, since legally a “person” may be a corporation. Natural persons individually or jointly with their spouse have a net worth in excess of $1 million; have an income in excess of $200,000 for the two most recent years with an expectation of such income in the current year; or have joint income with their spouse for the two most recent years in excess of $300,000.

Also included are:

(i) Certain banks, insurance companies, investment companies, small business investment companies, certain employee benefit plans, savings & loan associations, building & loan associations, cooperative banks, homestead associations, or similar institutions supervised and examined by state or federal authority, purchasing for their own account or in a fiduciary capacity;

(ii) Nonprofit tax-exempt organizations, corporations, partnerships, or business trusts with total assets of $5 million or more, provided that such entities have not been formed solely for the purpose of purchasing securities offered pursuant to Regulation D; and

(iii) Trusts (non-business) with assets in excess of $5 million, not having been formed for the sole purpose of purchasing securities offered, and are directed by a sophisticated person per Regulation D Rule 506.

How do I buy stock in Internet Direct Private Offerings or Private Placements?

Private Placements and some Direct Public Offerings are generally available to Accredited Investors. Please fill out an Online Suitability Questionnaire so in the future can consider you for future Direct Public Offerings or Private Placements.

Where will Direct Public Offering or Private Placement stocks trade?

Companies that go public directly generally list their stock on the NASDAQ National Market, Small Cap Nasdaq or OTC Bulletin Board where an investor would be able to buy and sell the Direct Public Offering stock directly in the public marketplace. Private Placements are generally illiquid until the company goes public through an underwriter in an Initial Public Offering, a Direct Public Offering, or is otherwise listed or taken over.

How would I sell my Direct Public Offering or Private Placement stock?

Direct Public Offering or Private Placement stock is generally saleable through any NASD Broker Dealer after the Direct Public Offering is listed. It is possible that the company issuing the Private Placement may never list on an exchange, thus providing no liquidity for investors. Direct Public Offerings should be liquid immediately if listing is achieved unless there is a lock-up through Rule 144 insider stock.

How can I receive a return on my investment in a Direct Public Offering?

Once a listing is achieved, the issuer could pay out dividends; there could be an increase in the issuer’s stock price; the issuer could be bought out by another company; or the issuer could complete a further secondary offering in the future. As with an investment in any small business, you may never receive a return. The keys to speculative investing include:

  1. Never put into a deal any money that you cannot afford to lose.
  2. Diversify. Invest small amounts in various deals.
  3. Allow these small emerging growth companies time to develop. Rome wasn’t built in a day. Sometimes these smaller companies experience growing pains that could take time to work out. The key is to be patient with them and not always be in a rush to sell or you could take out your principal and hold on to the rest.

Why Should I Invest in a Direct Public Offering or Private Placement?

There is no doubt that one of the most exciting sectors in the market today is the internet. It is hard to believe that many of today’s multi-billion dollar companies were only concepts or ideas just a few years ago. Money to finance these companies was often raised through seed financing and through venture capitalists in the form of private placements. These companies were once start-ups, at a developmental stage, or at other times fully functioning. Direct Public Offerings and Private Placements are for investors who know that over time cutting edge emerging growth companies are potentially exciting and potentially very lucrative. However, one must understand the risks of private placements. The private placement securities are not liquid in the marketplace until they are listed on an exchange. Therefore, investors must be willing and able to hold the investment until that time. As previously stated, these companies sometimes never succeed in going public or otherwise achieving a listing. However, there are instances when getting involved in a private placement can be extremely lucrative to a patient investor. The key once again is to do your own due diligence process. Direct Public Offerings are cutting edge ways for investors to invest over the web. Be careful and evaluate these deals on your own. These deals are typically far less risky than private placements because a public marketplace exists, provided the Direct Public Offering is being listed on a major exchange.