Why use a Direct Public Offering (DPO) to Go Public on the OTC Markets

An Initial Public Offering or IPO is used by issuers seeking to go public using an underwriter. IPOs are typically conducted by issuers listing on the NYSE Stock Exchange (“NYSE”) or NASDAQ Stock Markets (“NASDAQ”). Issuers most often use a Direct Public Offering or DPO in a going public transaction seeking quotation on the OTC Markets.  Direct Public Offerings provide a means for a company to go public and sell its shares directly to investors without the use of an underwriter. Even after a Direct Public Offering, the issuer can plan to use the services of an underwriter in the future and/or uplist to NASDAQ or the NYSE.

With a Direct Public Offering, the company files a Form S-1 registration statement with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), if it is a domestic issuer. If the company is a foreign issuer, it can use SEC Form S-1 or Form F-1 for its registration statement.

Both Form S-1 and Form F-1 registration statements offer flexibility, and each can be used to register securities on its own behalf in an initial public offering, to register securities on behalf of its selling security holders in a secondary offering, or register securities on both its own behalf and for selling security holders.

A significant advantage of a Direct Public Offering using a registration statement on Form S-1 or Form F-1 is that the issuer can avoid many of the risks and expenses associated with reverse merger transactions. These can include undisclosed liabilities, sketchy corporate records, DTC Chills, and SEC trading suspensions. Both the NASDAQ and NYSE impose one-year waiting periods for companies after engaging in a reverse merger transaction. 

Form S-1  or Form F-1 Disclosures in Going Public Transactions

Form S-1 and Form F-1 registration statements require expansive disclosure about the Company, its business, management and securities.  

SEC Review of Form S-1 and Form F-1 Registration Statements

A review by the Securities and Exchange Commission (“SEC”) of the Form S-1 or Form F-1 registration statement is common for public companies and private companies going public for the first time.  Upon its review of the Form S-1, the SEC may render comments on the disclosures contained in the Form S-1 or Form F-1 that the company must address by filing amendments to its registration statement. When all of the SEC comments have been answered to the satisfaction of the SEC, the registration statement will be declared effective.

Additional Steps of Going Public in Direct Public Offerings

Filing a Form S-1 or Form F-1 registration statement by itself under any of the above scenarios will not cause the company’s shares to become publicly traded and will not result in the assignment of a ticker symbol.  The registration statement will cause the company to become subject to the SEC reporting requirements.  After satisfying the SEC’s requirements to go public, the issuer must comply with the requirements of the Financial Industry Regulatory Authority (“FINRA”) and the NYSE or NASDAQ listings criteria or OTC Markets requirements. During going public transaction, the Company should remain current in its SEC reporting obligations.

The Last Step for Issuers Gong public – Getting a Ticker Symbol

Generally, FINRA and the OTC Markets will require that the issuer have at least 35 shareholders who hold either registered shares or shares qualified in a Regulation A Offering.  The majority of the 35 holders should have paid cash consideration for their shares, and they should not be affiliates of the issuer.

Float Requirements in Going Public Transactions

In order to obtain a ticker symbol on the OTC Markets, a company must meet OTC Markets’ public float requirements.  The company’s outstanding shares held by its non-affiliates in the aggregate should represent at least 10% of the issuer’s outstanding securities.  These shares become what is often referred to as the “Public Float.”  The Public Float must also be somewhat evenly distributed among shareholders.  These shares should be unrestricted securities either because the shares were registered with the SEC on Form S-1 or F-1 or exempt from registration.

The Sponsoring Market Maker and Form 211 

For issuers seeking quotation on the OTC Markets, FINRA requires companies to locate a sponsoring market maker to submit a Form 211 (“211”) pursuant to Rule 15c-211.  Upon the sponsoring market maker filing the Company’s Form 211, FINRA will conduct a review and provide comments to the sponsoring market maker, which the company and its securities attorney must address.  Upon receipt of confirmation that all comments have been answered satisfactorily, a ticker symbol is assigned, and the company’s securities become publicly traded.

By undertaking a Direct Public Offering, the issuer avoids many of the expenses and risks associated with reverse merger transactions, including incomplete records, pending lawsuits and other liabilities, including securities violations.  A Direct Public Offering using Form S-1 or Form F-1 offers a cost-effective and time-effective solution for a company seeking public company status.

For further information about this securities law blog, please contact Brenda Hamilton, Securities Attorney, at 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E. Palmetto Park Rd., Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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www.SecuritiesLawyer101.com