Direct Public Offerings
Why DPOs are Good for the Business and for Society
One of our clients asked us to explain, for its board of directors and other backers, why a direct public offering would be good for the business and for society in general. This is an edited version of our response.
Why a DPO is good for your business:
1. A direct public offering is consistent with your values. Creating a community, based upon shared beliefs, has always been your philosophy and practice. Sharing ownership of the business is a logical extension of those values. The “small group of thoughtful, committed individuals,” from your Margaret Mead quotation, becomes even more capable of making change when it is joined in ownership of a national business.
2. Shareowners are better customers and goodwill ambassadors. Businesses that have marketed shareownership directly to their customers find that shareowner customers purchase two to three times the average for other active customers. You already have word-of-mouth support from your many thousands of customers. This loyalty, and desire to carry the message, is greatly increased through shareownership.
3. Long-term shareowners provide stable relationships. Individuals who have purchased shareownership directly from the business will generally have a several-year horizon for their investment and will hold through ups and downs, if they are kept informed with regular information. This contrasts with institutional money managers and the securities analysts who serve them, who are generally focused on quarter-to-quarter performance. They are likely to sell upon one quarter’s below-forecast results, requiring renewed efforts to generate buy interest among others.
4. Price volatility/litigation risk is reduced with community share ownership. Money managers and other analyst-influenced investors tend to transact in large blocks and move as a herd on short notice. The resulting large price changes can force abandonment of acquisition or capital formation plans and can bring lawsuits. Long-term individual investors do not sell on isolated events, particularly if they are kept informed, and they act independently. They tend to buy on price declines, rather than sell, and they are not interested in being part of a class suing their directors and management.
5. Direct share marketing more efficiently manages capital formation. Financing through intermediaries often requires catching “a window of opportunity” in the market, whether or not it fits with the uses a business has for new capital. Direct public offerings are far less subject to fads, so they can be coordinated with capital budgeting.
6. Your shareowner communities support management’s vision. Individuals who buy their shares directly from you have made their own decision to invest, not because of a broker’s recommendation. They are joining your founders as a shareowner, not just buying a financial instrument as an impersonal investment. Hostile tender offers or proxy solicitations are not likely to attract them. Nor will individuals insist that management follow the latest trend in corporate strategy. They can be marshaled to assist the business in issues involving customers, government agencies or the media.
7. Individual shareowners require less management time. Individuals do not expect to tell management how to run the business. Nor do they seek selective disclosure of information by quizzing management. Institutional money managers demand frequent CEO/CFO telephone interviews, in-person road shows and special reports. Executives of companies that have marketed shares directly to individuals have found they spend a fourth as much time on shareowner communications as their institutionally-owned peers.
8. You can use direct purchase plans to maintain market demand. People who invest through brokers generally view it as a single transaction rather than a continuous program. Once you have a trading market and several thousand customer/shareowners, you can have a program for monthly share purchases through direct debits to the shareowner’s designated bank account. In addition to serving your shareowners, you would build an ongoing predictable buy-side volume.
9. Cost of capital will be better with a DPO. Transaction costs are generally half or less than an underwritten public offering. More significant, the percentage of your shareownership to be sold is determined by the board of directors, rather than by a securities broker-dealer whose primary interest may be serving its buy-side customers with underpriced shares.
10. DPOs don’t create shareowner veto powers. Institutional investors, who dominate the underwritten offering market, have recently made demands on CEOs and directors about how they run the business. Private financings, such as strategic alliances with major corporations, venture capital or “angel” investors, tend to include covenants in the investment documents to restrict management. When individuals buy in a direct public offering, they don’t expect to interfere in management.
Why a DPO is good for society in general:
1. Direct share ownership increases democracy in business. Much more of what affects our lives now emanates from business, rather than from government. Yet, most “publicly-owned” businesses are actually controlled by a small group of professional money managers, using funds gathered from the public through retirement plans, insurance, public charities and mutual funds.
2. DPOs cause a natural selection of businesses, so they reflect shared values. Institutional money managers base their investment decisions upon limited risk/reward analyses. We have seen that individuals invest in DPOs for dual motives: They do the same risk/reward study (generally for a much longer term). But they also involve their social and moral values in deciding whether they want to support this business. Over time, surviving businesses will reflect society’s shared values.
3. Individual shareownership provides better corporate direction. The objectives of the “investment community” of brokers and money managers are different from the objectives of customers, employees, neighbors and other members of a business-based community. Direct ownership helps people learn about business from the viewpoint of an owner, not just a consumer and employee. They add a much broader perspective for management.
4. Direct share ownership can free individuals from wage dependence. The path to financial independence can be a long, slow one with diversified managed investments, like retirement plans and mutual funds. Security before retirement frequently happens from the ownership of shares in one or two companies -- by investment or employee stock options. DPOs can bring financial freedom to early investors, so that society can have significant contributions from the work of people with independent incomes.
5. Direct shareownership provides a sense of power. There is a frustration that comes from evidence that business controls governments, universities, think tanks and other powerful institutions. Owning some shares, being able to vote for directors, proposing resolutions for the annual meeting -- these can provide some sense that individuals can ultimately change the values and actions of business.
6. Direct shareownership relieves the sense of alienation. Most of us have an “us against them” attitude about business. It may be the workers against the bosses or the powerless many versus the powerful elite. Owning shares creates a sense of community, in the context of a business.
7. DPOs create new wealth, reversing the continuing concentration. Ownership of capital has evolved into smaller and smaller percentages of the population, especially in the last few years. Some broadening of ownership has come from employee stock options, which have made multimillionaires of a few thousand former wage earners. DPOs bring that opportunity to individuals who pick the right early stage company.
8. Businesses can survive that don’t fit the traditional mold. Access to capital is usually a test of conformity. Venture capitalists, bank loan officers, government small business program administrators, even “angel” investors tend to have conscious and unconscious standards that cause them to reject business concepts and entrepreneurs who are too different from the norm of their experiences. DPOs allow people on the fringe to find others like them and join together in ownership.
9. Owning shares directly allows people to vote with their capital. So many of us question whether our political votes mean much at all. Through DPOs we can use some discretionary capital to vote for a business concept, or a management team that may be effective in doing the right thing, as we believe it to be. Our investment may be small, but DPOs bring together like-minded people, so that together we can make a difference.
10. The ability to attract capital from individuals will be a competitive tool. DPOs are the lowest cost, permanent capital available. Businesses that can do DPOs to meet their objectives will succeed over those who must rely on traditional sources. Managements that survive will be those who have committed to serving the needs and desires of broad constituencies of individuals.