| The Direct Public Offering (“DPO”) provides a viable method of obtaining public company status without many of risks and expenses associated with reverse mergers into public shell companies. Issuers going public using a DPO also have fewer hurdles when seeking electronic trading eligibility from Depository Trust Company (“DTC”).
Types of Registered Offerings Initial Public Offering An initial public offering (“IPO”) is where an investment banking firm assists an issuer with raising funds by selling securities that have been registered under the Securities Act of 1933, as amended (the “1933 Act”). Many issuers will not meet the income, asset, revenue or capital requirement standards that investment banking firms now have and will go public without the use of an underwriter. Direct Public Offering A direct public offering (“DPO”) involves an issuer with the assistance of its SEC attorney filing a registration statement with the SEC, typically on Form S-1 (“S-1) that registers shares from the issuer’s treasury. Once the SEC declares the registration statement effective, the issuer then sells the registered securities directly to investors without the use of an underwriter. A direct public offering can also involve the issuer filing a resale registration on Form S-1 to registers shares that are held by its existing shareholders. This method does not register securities for the issuer to sell to investors. SEC Review After the issuer and its SEC attorney file the registration statement it is then subject to review by the SEC. After review of the registration statement the SEC may render comments which the issuer’s SEC lawyer will address by filing amendments to the S-1 registration statement. When all of the SEC comments have been answered to the satisfaction of the SEC, it will declare the registration statement effective. Getting a Ticker Symbol Filing a registration statement under any of the above methods will not cause an issuer’s securities to become publicly traded and it will not result in the assignment of a ticker symbol. After satisfying all the requirements of the SEC, the issuer then must comply with the requirements of the Financial Industry Regulatory Authority (“FINRA”), in order to obtain its ticker symbol. Establishing an Active Market Generally, FINRA requires that the issuer have at least 25 shareholders who hold either registered shares or with respect to Pink Sheet listed issuers, shares that have been held by non-affiliate investors for twelve months. The majority of the 25 holders must have paid cash consideration for their shares. Additionally, these shares in the aggregate should represent at least 10% of the issuer’s outstanding securities and are often referred to as the “Float.” The Float must also be somewhat evenly distributed without significant concentration in one or a few shareholders. Form 211 FINRA requires the issuers to locate a sponsoring market maker to file a Form 211 (“211”). After the sponsoring market maker files a 211, FINRA reviews the 211 and provides comments for the sponsor to address. Upon receipt of confirmation that all comments have been answered satisfactorily, a ticker symbol is assigned and the issuers’ securities are publicly traded. By undertaking the DPO, the issuer has avoid the expenses and risk associated with reverse merger transactions. Reverse mergers are rarely done properly and have therefore become vehicles of fraud. Shell companies often have incomplete and sloppy records, pending lawsuits and other liabilities including securities violations. A common misconception exists that a reverse merger is a fast and certain method of becoming publicly traded. If proper due diligence is undertaken more often than not, the Shell company will not pass scrutiny of a qualified SEC attorney. For further information about this article, please contact an SEC attorney at (561) 416-8956 or Bhamilton@securitieslawyer101. |
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