Initial Public Offering (IPO) & Direct Public Offering (DPO) – Defined

When a company goes “Public what they are doing is transforming themselves from a private entity where one or more investors own the company into a company where shares are sold to the common public.  When a firm starts out, they may have one investor which could be the individual starting the company.  But, a company may want raise capital.  And, this company could offer shares of the company to other individuals in order to raise money.  This may be done as a Direct Public Offering, or, DPO.  And, the company may add stipulations to the sale of these shares such as limiting the sale of the shares in the future.

When someone owns shares of a privately-held company, they hold the rights of ownership of their portion of the company.  But, privately-held shares are sometimes difficult to liquidate if an individual would like to sell their respective shares.  While doing a DPO has its benefits, there are also drawbacks related to share ownership with a DPO.  The big drawback to privately-held, or closely-held shares being that transfer of ownership could be difficult.

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Going Public in an Initial Public Offering

Eventually, the firm may want to raise even more capital or, the company may want to enable an transfers of ownership smoothly and quickly for its investors.  The benefit of this is that early investors or employees who are vested with stock ownership, may want to cash out.  Going public, or doing an Initial Public Offering, would entail listing on one of the various stock exchanges.

What a company is doing with this process is offering to sell ownership via stock to the broader public.  The first time a company does this is called the Initial Public Offering.  This is the first time that shares of stock would have been offered for sale to a company.  If the company wanted to sell additional shares afterward, this would only be termed a public offering.

Typically, when a firm offers share in an IPO or additional shares to the broader public, the firm may enlist the help of an investment banker such as JPMorgan or Merrill Lynch.  These entities with their vast customer base would offer shares of the company to its customer base prior to actual trading of the stock.  Then, when the stock is formally listed and traded, the owners of these shares would have the ability to trade these shares.

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