Direct Offering

A direct offering is sometimes referred to as direct placement. It is a type of offering that allows the issuing company to sell its securities directly to investors without using a middleman, such as an investment bank. When a company decides to use a direct offering rather than an initial public offering (IPO), it eliminates most of the costs associated with going public. Usually, companies going public through an IPO are required to use intermediaries such as investment banks, which handle the offering process on behalf of the issuer. Eliminating the intermediaries lowers the cost of capital of the offering.

When raising capital, small- to medium-sized companies prefer direct offering over IPOs, since it allows them to raise capital directly from the community where they operate from, instead of borrowing from financial institutions such as banks.

Direct Offering vs. Initial Public Offering

A direct offering and an initial public offering are the two main methods in which a company can raise funds by selling securities in a public exchange market. In an IPO, the issuer creates new shares that are underwritten by an intermediary, such as an investment bank or financial advisors. The intermediary determines the IPO price of shares and is in charge of the offering process on behalf of the issuer. On some occasions, the intermediary may be required to guarantee the sale of a specific number of shares out of the shares offered to the public.

In contrast, a direct offering is less complicated compared to an IPO. It involves selling securities directly to the public without going through an intermediary. No new shares are offered to the public, and there is no guarantee for the sale of securities. The issuing company sets the terms of issue, such as the offer price, minimum amount of investment per investor, and the maximum number of securities that each investor can buy.

source: corporatefinanceinstitute.com