Tips for Going Public With a Direct Public Offering

Direct Public Offering Attorney

Direct Public Offering Lawyer – Securities Law Blog

More and more issuers going public opt for a direct public offering. In a direct public offering management sells shares of the company’s stock directly to investors, rather than through the efforts of an underwriter. Going public with a direct public offering eliminates costs and risks associated with a reverse merger transaction. Private companies conducting a direct public offering should consider the pointers below to ensure a successful and cost-effective going public transaction.

The direct public offering process provides options for multiple structures, each with its own unique benefits and requirements. The decision about the appropriate going public structure often involves complex legal issues that vary depending upon the needs of the particular company involved.

Direct public offerings involve complex disclosures and legal issues, including those required by the Form S-1 registration statement. Forms S-1 are reviewed by the Corporation Finance Division of the Securities and Exchange Commission (“SEC”).  Each of the multiple reviews prompts comments to which the company must respond with the help of its securities attorney.  The attorney will draft these responses and file amendments to the registration statement.  When the SEC examiners feel the Form S-1 has satisfied all requirements, the registration statement will be deemed effective.

Once a company completes its direct public offering, it will be fully reporting with the SEC and must submit various reports and filings, including but not limited to Forms 10-K, 10-Q and 8-K.

Only a qualified securities attorney can provide the guidance necessary to determine the appropriate structure for the direct public offering and compile the required disclosures. Companies should ensure that their own best interests are their priority and avoid lawyers who have been involved in repeated reverse merger transactions.

Seed Shareholders

The Financial Industry Regulatory Authority (“FINRA”) requires companies going public to demonstrate that an orderly and liquid market can be created, which means that a public float must be created.  If the existence of an adequate public float cannot be demonstrated, the company’s sponsoring market maker cannot initiate quotations of a company’s securities.

Accordingly, the company should have approximately 35 shareholders who paid cash consideration for their shares and own at least 500 shares of a company’s stock each.  These shareholders should hold an aggregate of at least 250,000 shares and there should not be any concentration of ownership in one or a few shareholders.

Shell Company Status

Once the Form S-1 has been declared effective, the company must locate a sponsoring market maker to file its Form 211.  Unfortunately for many startups, the 211 process is difficult, thanks to promoters who create shell companies for reverse merger transactions using bogus business plans.  If FINRA  becomes concerned that a company may be a shell, it will make the comment period of the Form 211 process difficult and time consuming by requesting that the company address the question of possible shell status exhaustively.  Without proper legal advice many startups will be unable to deal with this problem successfully, and so will not receive their ticker symbols.

Before submitting a Form 211 application to initiate quotation of a company’s securities, the company should be certain it can overcome shell status.  It is important to note that this does not necessarily mean the issuer must have revenues.  The question of what constitutes active operations is a matter of fact.  Given that, startups and companies without revenues should be prepared to provide FINRA with sufficient documentary evidence of meaningful operations.

 Financial Statements

A Form S-1 registration statement requires that the issuer provide audited financial statements for its most recent two fiscal years or shorter period that it has been in existence.  The company must have an accountant who is capable of preparing GAAP-compliant financial statements and the necessary footnotes.

A company going public must hire an independent registered public accounting firm to audit the financial statements prepared by its accountant.  The auditor must also provide an independent opinion addressing whether or not those financial statements are relevant, accurate, complete, and fairly presented.

Disclosures in the Going Public Process

The SEC and FINRA may examine the company’s website, press releases and other publicly available information looking for potentially misleading statements.  If either finds improper statements, they will issue comments asking the company to offer explanations.

If the SEC becomes concerned about misleading disclosures it will not approve the company’s registration statement.  Similarly, if FINRA believes an issuer is using untrue or misleading disclosures to condition the market for a company’s securities, it will not approve the Form 211 application to initiate quotations in the OTC Markets.

Addressing areas of concern regarding disclosure early with your attorney is often much easier than waiting for the comment to arise.

The Transfer Agent

A transfer agent is the custodian of the company’s shareholder records, including purchases, sales, transfers and account balances.  After completion of the going public transaction, as the company’s securities begin to trade actively, it becomes critical to have efficient transfer agent operations.

Setting up transfer agency early, and then issuing and shipping shares to your initial subscribing shareholders is a formality that helps avoid confusion and extra burdens for the company.

Choosing a qualified transfer agent that offers a reasonable fee structure and terms is an important yet often overlooked step in the process.  Experienced legal counsel will usually have a good sense of the field of service providers and can help you.

The Sponsoring Market Maker and DTC Participant

It is becoming more and more difficult for companies going public to locate a qualified sponsoring market maker to submit their Form 211 application to FINRA.  Market makers cannot be compensated for acting as a sponsor, and compiling the application entails a tremendous amount of time and effort.  Rule 15c2-11(a)(5) of the Securities Exchange Act of 1934, as amended, requires sponsoring market makers to undertake significant due diligence to achieve compliance.

In order for securities to trade electronically, the company must locate a Depository Trust Company (“DTC”) participant to file its application for DTC eligibility.  Most often the participant is a market maker.  The issuer should attempt to obtain a commitment from its sponsoring market maker to file both its Form 211 and application for DTC eligibility.

Once all of the above has been accomplished, the new public company’s stock will be eligible to trade electronically.  While the process may seem daunting, especially given that management of small startups rarely has a good understanding of regulatory requirements, with the help of an experienced securities attorney it can be made relatively painless.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit   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 Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855