Tips For Going Public With A Direct Public Offering

Tips for a DPO - SEC reporting requirements

More and more issuers going public opt for a direct public offering. Unlike an Initial Public Offering (IPO), in a direct public offering, the issuer sells shares of its stock directly to investors rather than through an underwriter. Going public transactions using a direct public offering eliminates the costs and risks associated with a reverse merger transaction. Once public, the issuer is more easily able to raise capital in a secondary securities offering. 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.  

OTC Markets OTCQB and OTC Pink Tiers

The OTC Markets OTCQB Market has the following requirements for quotation:

  • Meet a minimum bid price test of $0.01 (securities that do not meet the minimum bid price test will be downgraded to OTC Pink)
  • Audited Annual Financials (PCAOB Audit required for U.S. Companies)
  • Submit an application to OTCQB and pay an application and annual fee
  • Not be in bankruptcy
  • Have at least 50 Beneficial Shareholders, each owning at least 100 shares
  • Freely traded Public Float of at least 10% of the total issued and outstanding of that security (Companies with a freely traded Public Float of at least 5% (and $2 million in market value of public float), or a separate class of securities traded on a national exchange may apply for an exemption)
  • Transfer agent that participates in the Transfer Agent Verified Share Program (US Companies only)
  • Submit an OTCQB Annual Certification confirming the Company Profile displayed on is current and complete and providing additional information on officers, directors, and controlling shareholders

The OTC Markets OTC Pink Market has the following requirements for quotation:

  • Comply with the requirements of Securities Exchange Act Rule 15c2-11 
  • Make current information publicly available OTC Markets Group will confirm and designate the company in the Current Information or Limited Information tier

SEC Disclosure Requirements

Direct public offerings involve complex disclosures and legal issues, including those required by the Form S-1 registration statement or Regulation A. Forms S-1 registration statements and Regulation A Offerings are subject to review 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 or Regulation A Offering Statement.  When the SEC examiners feel the disclosures in the Form S-1  or Regulation A Offering Statement have satisfied all SEC disclosure requirements, the registration statement will be deemed effective.

Once a company completes its direct public offering, it will either be: (i) 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; or (ii) subject to Regulation A reporting requirements.

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. 

Shell Company Status

Once the Form S-1 has been declared effective by the SEC, 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 manufacture 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 not be able to successfully address this problem and will not receive their ticker symbols despite becoming subject to SEC reporting requirements.

Before the sponsoring market maker submits a Form 211 application to initiate a quotation of a company’s securities, the company should be certain it can overcome shell status and meet the OTC Markets requirements above.  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 Statement Requirements 

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.

A Form S-1 registration statement and Regulation A Tier 2 Offering requires that the issuer provide audited financial statements for its most recent two fiscal years or the shorter period that it has been in existence.  If using Form S-1 or other registration statement, the company must have an accountant who is capable of preparing GAAP-compliant financial statements and the necessary footnotes.

Other Public Disclosures In The Going Public Process

The SEC and FINRA may examine the company’s website, press releases and other publicly available information and look for potentially misleading statements.  If either finds improper statements by the issuer, 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 a 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.  A market maker 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 the 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, 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
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