An IPO (Initial Public Offering) and a DPO (Direct Public Offering) are both when a company directly offers its stock to the public by listing it on an exchange, like the NASDAQ. What is the difference?
During an IPO, a company will issue new shares, which are backed by big banks and institutions. This is often referred to as a primary offering. These big banks and institutions will usually help set the initial price of the stock and buy shares of that company. When a company initially goes public, one can purchase the stock at the price of the Initial Public Offering. IPOs are considered a primary offering because it is the first issuance of stock from a private company for public sale (new shares).
A Direct Public Offering (or DPO) is also a primary offering because the company offers its securities directly to the public, like an IPO. However, a DPO differs because it is traded over the counter, rather than a public exchange (such as the NYSE (New York Stock Exchange)). This way of offering a security in the over-the-counter market, allows the employees, investors, and anyone that holds the stock to cut out the intermediaries from the public offering, essentially lowering price of the stock. This is attractive to small companies because they can directly sell shares to the public without any lockup period. Raising money independently allows a firm to avoid restrictions of capital funding because the terms are established solely by the issuing company.
Recently, some well-known companies have gone public by releasing their primary shares (IPO and DPO) to the public. Coinbase, Duolingo, and Robinhood have been some of the most renowned IPOs in the past couple of months and you can now buy and sell those stocks in the secondary market.
Now, the big question is whether you should invest on the first day of the offering or wait to see if the shares sell at a cheaper price. In the past year, Affirm (a company that helps create payment plans for consumer items) doubled in price the first day after the IPO; going from $49.99 per share, up to $97 per share. Almost 1 month later, Affirm’s stock hit an all-time high of $146 per share. After hitting all-time highs, the stock started to decrease in value. Over the next few months, the stock lost over 50% of its value, and is currently sitting around $60 per share. The same can be said about Coinbase. It was originally listed with a DPO and after it opened; the price went from $381 to $429 in a matter of minutes, only to decline for the next few weeks as the price started to correct itself down to the $225-$245 price range. Based on the recent IPOs and DPOs in the past year, we can see that the price of the stock increases substantially for the first couple of days, however, the price seems to correct itself as the IPO excitement around the stock wears off and secondary market trading begins.
Call us if you have any questions about past or future initial public offerings! We are happy to help!
Written by: Jack McCormack