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182 Locavesting
IPOs, however, come at a cost. For one, they are expensive.
Costs for legal, listing, and accounting fees can easily exceed $1
million, so IPOs make sense only for companies seeking to raise
large sums, usually $25 million or more. Once public, there is
the ongoing expense of managing investors and issuing quarterly
audited fi nancial reports. Suddenly, the company is thrust into
the harsh glare of the public spotlight, where the demands of Wall
Street can make it diffi cult, if not impossible, to make strategic
investments and management decisions that lower earnings in the
short term.
More broadly, the public markets have not been welcoming
to small companies lately. The minimum thresholds to list on the
NYSE or even the traditionally smaller cap NASDAQ rule out companies
without a signifi cant market capitalization, 1 but a bigger
obstacle is that investment banks these days don’t want to waste
time on any but the biggest and most lucrative IPOs. The median
IPO size 20 years ago was $10 million; by 2009, it was $140 million.
In addition, the volatility and short- term demands of the public
markets have scared off many promising IPO candidates—one reason
the number of IPOs has declined precipitously in recent years.
But there is another twist that is gaining favor among smaller
companies: the direct public offering, or DPO. Think of it as an
IPO for the do- it- yourself (DIY) crowd.
Direct Public Offering
Like the more familiar initial public offering, or IPO, a direct public
offering (DPO) raises capital by selling shares to the public. The
difference is that the company raising the money handles the marketing
of the offering itself, rather than going through a Wall Street
underwriter. Eliminating the middleman reduces costs, making the
public markets more accessible to smaller companies for whom
a conventional IPO may be out of reach. For investors, DPOs allow
them to get in on early stage investments typically reserved for angels
and venture capitalists.