Direct Public Offering

The DPO Process Including Form S-1 Registration Statement Requirements

One of the methods of going public is directly through a public offering.  In today’s financial environment, many Issuers are choosing to self-underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO).  Management of companies considering a going public transaction have a desire to understand the required disclosures and content of a registration statement.  This blog provides that information.

Pursuant to Section 5 of the Securities Act of 1933, as amended (“Securities Act”), it is unlawful to “offer” or “sell” securities without a valid effective registration statement unless an exemption is available.  Companies desiring to offer and sell securities to the public with the intention of creating a public market or going public must file with the SEC and provide prospective investors with a registration statement containing all material information concerning the company and the securities offered.  Currently all domestic Issuers must use either form S-1 or S-3.  Form S-3 is limited to larger filers with a minimum of $75 million in annual revenues, among other requirements.  All other Issuers must use form S-1.

The DPO Regulated Time Periods

There are generally three regulated time periods in a DPO:

(i) the pre-filing period, which begins when the Issuer decides to proceed with an offering.  During this period, counsel prepares the registration statement and prospectus.

(ii)  the waiting or “quiet period,” which is the time from the filing of the registration statement until it is declared effective.  During this time the Issuer can engage in limited marketing (offers only) of the offering through the use of the filed registration statement, which must clearly indicate that it is not the final document (often referred to as a “red herring”).

(iii)  the post-effective period, in which the registration statement is effective and the Issuer can proceed with sales of the securities registered.

In addition to disclosure and regulations related to the offering during all three periods, marketing and public communications of the Issuer are restricted.  See the section “Restrictions on Communications Related to DPO’s” below.

The S-1 In General

There are four primary regulations governing the preparation and filing of Form S-1:

(i)  Regulation C – contains the general requirements for preparing and filing the Form S-1, including within Regulation Care regulations and procedures related to (a) the treatment of confidential information; (b) amending a registration statement prior to effectiveness; (c) procedures to file a post-effective amendment; and (d) the “plain English” rule.

(ii)  Regulation S-T – requires that all registration statements, exhibits and documents be electronically filed through the SEC’s EDGAR system.

(iv)  Regulation S-K – sets forth, in detail, all the disclosure requirements for all the sections of the S-1.  Regulation S-K is the who, what, where, when and how requirements to complete the S-1.

(v)  Regulation S-X – sets forth the requirements with respect to the form and content of financial statements to be filed with the SEC.  Regulation S-X includes general rules applicable to the preparation of all financial statements and specific rules pertaining to particular industries and types of businesses.

The S-1 In particular

The format of the S-1 is as follows: (i) cover page; (ii) Part I (the prospectus); (iii) Part II (supplemental disclosure); (iv) undertakings; (v) signatures and powers of attorney; (vi) consents; and (vii) exhibits.

Cover Page

The cover page of a Form S-1 is required to set out the following basic information about the Issuer and the offering: (i) the Issuer’s exact legal name; (ii) the Issuer’s state of incorporation; (iii) the Issuer’s SIC code; (iv) the Issuer’s tax ID number; (v) the address and telephone number of the Issuer’s principal executive offices and of its agent for service of process; (vi) the maximum amount of securities proposed to be offered and amount of registration fee; (vii) the approximate date of commencement of the offering; and (viii) whether any of the securities are being registered “on the shelf” pursuant to Rule 415.

– See more HERE

Direct Public Offering or Reverse Merger; Know Your Best Option for Going Public


For at least the last twelve months, I have received calls daily from companies wanting to go public.  This interest in going public transactions signifies a big change from the few years prior.

Beginning in 2009, the small-cap and reverse merger, initial public offering (IPO) and direct public offering (DPO) markets diminished greatly.  I can identify at least seven main reasons for the downfall of the going public transactions.  Briefly, those reasons are:  (1) the general state of the economy, plainly stated, was not good; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese companies following reverse mergers; (3) the 2008 Rule 144 amendments including the prohibition of use of the rule for shell company and former shell company shareholders; (4) problems clearing penny stock with broker dealers and FINRA’s enforcement of broker-dealer and clearing house due diligence requirements related to penny stocks; (5) DTC scrutiny and difficulty in obtaining clearance following a reverse merger or other corporate restructuring and significantly DTC chills and locks; (6) increasing costs of reporting requirements, including the relatively new XBRL requirements;  and (7) the updated listing requirements imposed by NYSE, AMEX and NASDAQ and twelve-month waiting period prior to qualifying for listing following a reverse merger.

However, despite these issues, the fact is that going public is and remains the best way to access capital markets.  Public companies will always be able to attract a PIPE investor, equity line or similar financing (the costs and quality of these financing opportunities is beyond the scope of this blog).  For cash-poor companies, the use of a trading valuable stock is the only alternative for short-term growth and acquisitions.  At least in the USA, the stock market, day traders, public market activity and the interest in capital markets will never go away; they will just evolve to meet ever-changing demand and regulations.

What is a reverse merger?  What is the process?

A reverse merger is the most common alternative to an initial public offering (IPO) or direct public offering (DPO) for a company seeking to go public.  A “reverse merger” allows a privately held company to go public by acquiring a controlling interest in, and merging with, a public operating or public shell company.  The SEC defines a “shell company” as a publically traded company with (1) no or nominal operations and (2) either no or nominal assets or assets consisting solely of any amount of cash and cash equivalents.

In a reverse merger process, the private operating company shareholders exchange their shares of the private company for either new or existing shares of the public company so that at the end of the transaction, the shareholders of the private operating company own a majority of the public company and the private operating company has become a wholly owned subsidiary of the public company.  The public company assumes the operations of the private operating company.  At the closing, the private operating company has gone public by acquiring a controlling interest in a public company and having the public company assume operations of the operating entity.

A reverse merger is often structured as a reverse triangular merger.  In that case, the public shell forms a new subsidiary which the new subsidiary merges with the private operating business.  At the closing the private company shareholders exchange their ownership for shares in the public company, and the private operating business becomes a wholly owned subsidiary of the public company.  The primary benefit of the reverse triangular merger is the ease of shareholder consent.  That is because the sole shareholder of the acquisition subsidiary is the public company; the directors of the public company can approve the transaction on behalf of the acquiring subsidiary, avoiding the necessity of meeting the proxy requirements of the Securities Exchange Act of 1934.

Like any transaction involving the sale of securities, the issuance of securities to the private company shareholders must either be registered under Section 5 of the Securities Act or use an available exemption from registration.  Generally, shell companies rely on Section 4(a)(2) or Rule 506 of Regulation D under the Securities Act for such exemption.

– See more HERE