A direct public offering (DPO) allows a company to sell stock directly to the public without intermediaries like investment banks. This can significantly lower costs compared to a traditional IPO. DPOs provide an opportunity for more investors to access deals since allocations are not controlled by banks. Companies must handle their own marketing and SEC compliance. While DPOs can save on fees and provide access, they don't raise fresh capital. Trading may also be more volatile without bank involvement in setting an initial price. Overall, DPOs open up opportunities for companies and investors outside the banking system, but aren't without challenges.
The securities industry has seen significant changes over the past few decades, moving away from its traditional role of channeling capital from individual investors to businesses. Since the 1960s, while individual discretionary income and assets have significantly increased, the opportunities for individuals to invest in entrepreneurial companies through initial public offerings (IPOs) have decreased. This shift is largely due to structural changes within the industry that have favored institutional investors and prioritized profits through financial engineering over traditional brokerage services. Several key factors have contributed to this transformation. Firstly, institutions such as pension funds, insurance companies, and mutual funds now dominate trading volumes and markets, possessing large amounts of capital that make them efficient and profitable counterparts for investment banks. As a result, catering to individual investors has become less appealing. Secondly, the public's trust in IPOs and equity markets has diminished following poor post-IPO stock performance and perceived unfair allocations in high-demand issues. Thirdly, the securities industry has experienced significant consolidation through mergers and acquisitions, reducing the number of smaller stockbrokers who traditionally served individual investors and concentrating power in approximately 20 major firms. These large firms have shifted their business models towards more lucrative activities like derivatives trading, mergers and acquisitions advisory, proprietary investing, and asset management, which offer higher margins than traditional brokerage commissions from individuals. Consequently, investment banking revenues from stock and bond issuances have fallen from 80% of industry income in the 1960s to less than 20% today, with fee-based services such as research, analytics, and asset management now dominating. This transformation has led to a complete change in the investor base served by the securities industry, with corporations, institutions, and other financial services firms becoming the primary customers, while individual investors have been largely sidelined. This realignment has resulted in fewer companies conducting IPOs to raise growth capital, with major stock offerings mainly occurring between companies and large institutional asset managers in secondary transactions. This shift away from facilitating productive capital flows in the real economy signifies a departure from the securities industry's historical role as an intermediary between individual investors and entrepreneurial companies seeking growth capital. Without significant structural reforms, these trends are expected to persist, further distancing the industry from its broader capital formation objectives.
book.moreChapters
