Direct Public Offering Toolbox l By: Brenda Hamilton Attorney

Securities Lawyer 101 Blog

For companies with a reasonable time schedule for going public, a direct public offering provides an appealing method for obtaining public company status.  In a direct public offering, a company’s shares are sold directly to investors by management, rather than through an underwriter.

A primary benefit of a direct public offering is that the process  dramatically reduces the costs and risks associated with reverse merger transaction.  Companies using a direct public offering in their going public transaction should consider these useful tools to ensure a smooth transaction.

Shareholder Requirements in Direct Public Offerings.

The Financial Industry Regulatory Authority (“FINRA”) requires that a company’s securities develop an orderly and liquid market.  To meet this requirement you must have a shareholder base of at least 20 non-affiliated stockholders who have somewhat evenly distributed share ownership.  For example, if a large portion of a company’s free trading shares is concentrated in only a handful of shareholders, FINRA will not likely assign a ticker symbol.

Concentration of the public float is a red flag that often results in one or a few stockholders manipulating that market.

Financial Statements Requirements in Direct Public Offerings.

A direct public offering includes the filing of a registration statement with the SEC.  The issuer must include audited financial statements its two preceding fiscal years or shorter period that it has been in existence.  As soon as a decision has been made to go public, the company’s accountant should begin the process of preparing its financial statements and the company should elect its auditor who must be registered with the Public Company Oversight Accounting Board.  The Company’s accountant should provide GAAP-compliant financial statements and the footnotes to those financial statements to the Company’s auditor.  The auditor must audit those financial statements and prepare an independent opinion on whether or not the financial statements are accurate, complete, and fairly present the company’s financial condition.  The auditor is prohibited from preparing the financial statements for the issuer whose financial statements it audits.

Operational Activity in Direct Public Offerings.

FINRA frequently questions whether a company is a shell during the Form 211 comment process. This is particularly true for companies that do not have meaningful revenues.  The OTC Markets remains a ripe playing field for fraudsters setting up shells for reverse merger transactions.  As such, when FINRA sees a company that looks like it is being set up as a shell, it will render comments and you should be prepared to prove that the company has a legitimate plan of operations. Prior to FINRA allowing a market maker to submit quotations, an issuer should ensure that it is prepared to provide proof to FINRA that it is not a shell company.

Transfer Agents in Direct Public Offerings.

A transfer agent is the record keeper of the company’s shareholder records, including issuances, purchases, sales, transfers and account balances.  As a company’s shareholder list increases, it becomes critical to hire a reputable transfer agent to maintain its records.

Sponsoring Market Makers in Direct Public Offerings.  

To initiate quotations of a company’s securities in the OTC Markets, a sponsoring market maker must submit a Form 211 application to FINRA.  Market makers are prohibited from being compensated to submit a Form 211 to FINRA.  Rule 15c2-11(a)(5) of the Securities Exchange Act of 1934, as amended requires that sponsoring market makers perform sufficient due diligence before submitting a Form 211 to FINRA.

The due diligence often includes copies of subscription agreements for each stockholder and the front and back of checks evidencing payment.  Some may require copies of driver licenses, questionnaires and other materials. As such, companies should keep meticulous records of all offerings conducted.

Hire a Law Firm and Not a Going Public Consultant or Service.  

The direct public offering process is subject to expansive regulation and involves drafting and filing a registration statement with the SEC & responding to comments until the registration statement is declared effective, and drafting and filing post-effective amendments if required.   Many companies are exposed to unnecessary risk when they hire non-lawyers to prepare their SEC filings. Companies should avoid consultants who claim to work with securities lawyers and auditors.   In many instances these consultants collect a going public fee that includes compensated an auditor and the company’s securities lawyer. These types of arrangements create a myriad of ethical and independence issues for both the lawyer and auditor involved.

Companies should engage a competent, experienced securities attorney who can provide references from clients about their services.

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 and compliance 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