The Fallwater Partnership wants to incorporate and is considering using a DPO. Explain what a DPO is and discuss the advantages and disadvantages of this course of action

Answer 1

A DPO is a direct public offering of stock. It is a way a company raises capital for the first time by selling stock itself rather than going through Wall Street. In a DPO, Fallwater would typically sell shares to its customers, employees, suppliers, and members of the community. Advantages for Fallwater would be that a DPO is cheaper and faster than a regular public offering through an underwriter. Also, a DPO can be an effective marketing tool because shareholders become more loyal customers. Disadvantages are that significant management time can be consumed and cost efficiencies may not be realized. Each investor must receive written information about the company. The cost of preparing and sending these disclosure statements to many small investors may not be an efficient way to raise money. Also, setting up a system to permit sales of shares in the short term can be difficult. Finally, there is a limit to how much a company can raise using a DPO.