A "Direct Public Offering" (DPO) is a creative form of financing that is just beginning to be used by entrepreneurs nationwide.

This is a stock offering but one that differs considerably from the well known IPO (initial public offering) or venture capital or other forms of early stage financing. It combines elements of these techniques but adds a dimension that can be very powerful for you. DPOs are often used to secure clients, employees, suppliers or distributors as an added arm for your success while giving you the cash you need to grow. DPOs are registered security offerings with state security administrators. They involve simpler procedures and far less cost than a full registration with the SEC. Essentially, they allow small business equal access to the capital markets that are enjoyed by their big corporate brothers and sisters.

Conventional thinking in terms of business development, in financing, or in marketing, all pay very poor dividends today. Competition is just too tough. The use of a DPO can be the novel approach that gives you the capital you need while simultaneously marketing your product or services. A restaurant that sells stock to its customers is an example of a DPO. A smaller bank that has depositors and borrowers alike that own stock is often a DPO. When people are involved with you economically, an "affinity group," they become your loyal and helping supporters. DPOs have been used successfully for pure start-ups as well as firms that had existed and been privately financed for decades.

Over the last 15 years, Fortune 500 companies have reduced their workforce from 16 million to five million. Over the same time period, small business has added 20 million new jobs. They have done that with less than 1% of publicly traded equity capital, It is obvious that if this creative force had the money, they could propel the economy forward in spectacular fashion. The SEC has developed a hands-off approach for much of small business stock offerings, preferring that regulatory responsibility he principally with the states. As more people learn about and successfully use a DPO, this type of financing could become a favorite for emerging, high-growth American businesses.

DPOs generally fall under three regulatory classifications, Regulation D Section 504 of the Securities Act of 1933 has become the most widely known, called the "Small Corporate Offering Registration" or "SCOR." SCOR allows you to raise up to $1 million every twelve months, by registration with state securities administrations. Next, a Regulation A offering extends that size to $5 million, but also requires a registration with the Small Business Office of the SEC. Finally, intrastate offerings typically have no ceiling. Variations of these three exist as well with even more legal choices, but you'll generally find your needs filled with one of these options. Your attorney or possibly the office of your state security commission can point out advantages and disadvantages, and a free booklet is available from the SEC.

Direct Public Offering (DPO) Advantages

• By selling stock, raising equity, you have capital that you never have to pay back, such as a loan. Also, you don't have the continual need to meet interest and principal payments, or worry that a loan may be called back in,
  
  
• Typically, you'll surrender a smaller portion of equity for the same amount of capital than required by venture capitalists or even private placements. The difference lies in the stock market, where valuations are usually far higher than in non-public transactions.
  
  
• Undergoing this process gives you the experience with investment banking and shareholders long before you conduct an IPO. You'll know just what your stock can sell for and avoid much of the guesswork that goes into marketing a security.
  
  
• DPO sales involve extensive publicity campaigns unlike any other financing. This is a perfect opportunity for potential customers to find out about your company and its products. Money used in selling the stock does double-duty, it simultaneously extends your marketing.
  
  
• You can typically "test the waters" by making preliminary inquiries and advertising a potential stock sale. You can find out a lot before going through the expense and effort of a full-blown effort.
  
  
• The involvement of employees, suppliers, distributors and customers with your company all becomes more intensive and lasting when these people are economically motivated to see you succeed. Help can come in so many unexpected ways when you decide to open your vision and some of your profits to others.
  
  
• Equity capital can be magic for opening other financing doors and leveraging your company for years to come, Bank loans can be made on a secure basis when the risk has already been thrown off to investors who can sustain it. Government grants and loans, bond offerings, and even venture capital can be more attainable if you've reduced the risk of investing with you.
  
  
• By going these extra steps, both you and your company become seasoned prospects and can take a product or service more extensively into a market. By demonstrating that your stock can be sold and your company has a growing market presence, you show the management characteristics that investment money is looking for.

By successfully becoming a publicly-held company, you'll have a formula for future financing and even new companies. One successful entrepreneur using a DPO has financed more than a dozen.

Direct Public Offering (DPO) Disadvantages

With every set of advantages, an equal and opposite set of disadvantages exist as well. DPOs are a lot of hard work, getting a document through state regulators or the SEC is no easy task, and the successful sale of your stock can hardly be presumed. So far, most DPOs have been unsuccessful in achieving all their objectives, and this should be a caution to you. Don't let this fact stop you from fully considering a DPO as your best funding method, but don't write off more conventional methods as well. You may find that a DPO is only one part of a variety of financing techniques that properly fit your own growth cycle at different times.

Millions of dollars have been raised in some DPOs with the investment of just a few thousand dollars. Other entrepreneurs have put in hundreds of thousands and come up with nothing. On the surface this looks like a pure gamble, but it doesn't have to be. Enough experience exists to lay out a template for your success, given that you have a company that really warrants investment.

First, you want to have a company and a stock you're really proud of Does it pass the mother test? Would you want your own mother to buy stock in the company? Now? At this price?

Second, you're asking people who may be friends and neighbors to risk their capital with you. Are you far enough along so they aren't taking unnecessary product development risks that you really should be taking instead?

Third, everything costs money and takes time, usually more than you expected. Are you ready to commit capital and effort to an extensive and complex process that involves a lot of different skills? A DPO runs from soup to nuts, a highly involved document that requires accounting, legal, and business planning skills all the way to marketing and selling stock.

Fourth, can you identify or develop an affinity group who can naturally understand your business and place capital with you? If you haven't figured out just how to sell the issue, you probably won't get it sold.

If you can answer "yes" to all the above, then you're ready to take the first steps to a DPO. These moves should involve more than just yourself. Bring your accountant and your attorney together and lay out what you plan and get their input. They will be intimately involved with your success, and you want them on your side all the way. Next, talk it over with your employees, suppliers and distributors as well. Chances are that you'll get some very good ideas that didn't occur to you before. Contact some investment bankers and ask if they'd be interested in selling your issue. Friends in the media and elsewhere should be informed of your plans since a helpful word dropped by them can prove valuable. Call your state securities commission and ask if they have any suggestions. They may also provide you with a list of some of the companies that have made filings and you could try contacting them to learn of their experience.

The most common form of filing statement for a DPO is known as the "Form U-7" or a "Form 1-A." This consists of a 50 question form that lays out data that eventually becomes an offering statement, a prospectus. The theory had been that a businessman should be able to answer 50 questions and provide enough information for a person to make an intelligent estimate of the stock's attractiveness. Many of the questions will prove "not applicable" but others will take an enormous amount of work and thought. You should not underestimate just how much effort will really go into this. In addition, you'll have filing fees to pay, and eventually a printing bill for the prospectus. Not all the states use the U-7, but all have some variation of the form or an alternative for filing. Experience can be vastly different, from state to state.

4 Direct Public Offering Mistakes