IPO vs Direct Listing: Knowing the Difference

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Q: Why are companies choosing direct listings now?

In late June 2019, the cloud-based collaboration tool Slack (WORK) debuted on the NYSE as a publicly traded company. However, the company didn’t take a traditional IPO route where companies find an underwriter who will help raise funds for the IPO shares, find investors and then ultimately list on the public markets. Slack went with a direct listing, which means no new shares were sold to raise additional capital. Spotify did this last year and had success, as a well-known company there is more interest from investors.

Unfortunately, it was of little help; no direct listings were registered during the first two months of 2023. Companies that agree to a combination with a SPAC risk the possibility that investors will withdraw, causing the combination to fail and costing the target company time and resources. SPACs are created through IPOs as publicly traded shell companies with no operations but a mission to acquire a private target company and take it public. Congress mandated the regulations governing the current SPAC landscape and the first SPAC operating under those rules was formed in 1992. Like DPOs, SPACS really started drawing interest from the investment community only recently.

Why direct listings gained mind share

Pricing is determined in the NYSE opening auction based on supply and demand in the market at that time. In a traditional IPO, new primary shares being issued for the first time are sold to a subset of investors the night before public trading. In Direct Listings to date, public trading begins with the sale of shares from existing shareholders. A direct listing process, called a DLP, allows a company to sell shares directly to investors without involving intermediaries.

Price volatility is insulated through large shareholders during the listing process. (SPOT) went public on April 3, 2018, using a direct listing, making it one of the more prominent companies to do so. While the safety of an underwritten public listing may be the best choice for some companies, others see more benefits with a direct listing. Each week our editorial team keeps you up with the latest financial news, shares reading recommendations, and provides useful tips on how to make, save and grow your money.

Whether a company pursues a traditional IPO or a direct listing, they must file an S-1 with the U.S. When a company directly lists on the open market, there are no eligibility requirements or forms to fill out. The only requirement is to have sufficient capital in your account to purchase stock. Toppan Merrill, a leader in financial printing and communication solutions, is part of the Toppan Printing Co., Ltd., the world’s leading printing group, headquartered in Tokyo with approximately US$14 billion in annual sales. Toppan Merrill has been a pioneer and trusted partner to the financial, legal and corporate communities for five decades, providing secure, innovative solutions to complex content and communications requirements.

The promoters of the target company may be in a position to negotiate a premium valuation as the deal has to be completed within a specific time frame. If well-known executives back the SPAC, the target company may benefit from an experienced team and improved market visibility. Bruce Blythe is a veteran financial journalist with expertise in agriculture and food production; commodity futures; energy and biofuels; investing, trading, and money management; cryptocurrencies; retail; and technology. Most DPOs do not require registration with the Securities and Exchange Commission (SEC) because they qualify for an exemption from the federal registration requirements. The most commonly used exemptions are for intrastate offerings, offerings under $1 million (the Rule 504 exemption), and Regulation A. In such cases, state level registration is generally required.

Where can I lean more about investing in a direct listing?

The practice of investment banks buying stocks and then selling the stock themselves is not as common now. Instead, the investment banks will use their network to help market the stocks and drive sales. In addition to saving on fees, companies that follow the direct listing process may avoid the usual IPO restrictions, including lockup periods that prevent insiders from selling their shares for a defined period of time. In an initial public offering or IPO, the company creates additional shares underwritten by an investment bank that acts as an intermediary. The investment bank charges a fee to the company and works closely to ensure the IPO process is successful. A DPO lets a private company become public, typically without raising new funds, by selling shares directly to the public on an exchange.

It is because investors are more inclined to invest in companies that they have heard of before and understand. In a direct listing, a stock’s initial price movements may be volatile, because there is often no guaranteed number of shares that hit the market. Instead, available shares will come from the insiders who decide to sell into the market.

This is not an offer to sell, nor is it a solicitation of an offer to buy, any security. Such offer can only be made by Prospectus, Offering Memorandum or Information Statement. The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. All Promotional items and cash received during the calendar year will be included on your consolidated Form 1099. Please consult a legal or tax advisor for the most recent changes to the U.S. tax code and for rollover eligibility rules.

Pros and Cons of IPOs and Direct Listings

After a company decides to go public via an IPO, it chooses a lead underwriter to help with the securities registration process and selling of shares to the public. These underwriters perform due diligence to recommend a target price and create new shares of the company. In an IPO, current private shareholders are often locked from trading their shares in a moratorium period. Because the company going public is selling new shares, IPOs help the company raise capital. While the cost of an underwriter can be substantial, they are providing financial expertise and the ability to raise funds that the issuer may not have. Securities and Exchange Commission announced that it will allow companies to raise capital through direct listings, paving the way for circumvention of the traditional initial public offering (IPO) process.

You could buy it the first day it trades and face immediate pressure from heavily invested insiders who are trying to sell the shares they held going into the first day of trading. You might argue that this is a more fair form of trading, and you wouldn’t have the end of the lockup period hanging over you, as you would with an IPO. The share value of companies that went public using a direct listing within a study period rose 64.4% compared to 26.8% for traditional IPO companies, The Wall Street Journal reported using a University of Florida analysis. As a social investing app, Public provides financials for some of the well known publicly traded companies at your fingertips, so you can review stock-specific data and insights. Public Access and TransparencyThe Direct Listing provides access and opportunity for all investors, democratizing public company offerings even further than before.

We could see public investors becoming more active in buying shares of a private company ahead of its direct listing to establish positions earlier. DPOs are more like the farmer’s market, allowing companies to sell shares to investors on the stock market while bypassing the often lengthy and complicated IPO process. It skips IPO steps like going on the road to educate possible investors about the company’s products and plans, getting buy-in from major Wall Street banks, and offering a full suite of financial data to the public. Few companies https://g-markets.net/helpful-articles/javascript-candlestick-charts-examples/ pursue the method in part because it was originally devised as a way for existing investors to exit by selling their shares publicly and not to generate new capital, although that’s changing. Last year, the SEC began allowing a hybrid approach, called a primary direct floor listing, in which companies can both raise new money and give existing investors an exit through the public sale of their shares. They work to build excitement about the offering, gauge the investors’ interest and set pricing through a process called book building.

There are several benefits of a direct listing that attract companies to the process. First, by going public the company provides liquidity for existing shareholders by allowing them to freely sell their shares in the public market. It also helps them avoid the indirect cost of selling the stocks at a discount. But how a company gets there is what makes a direct listing different from a traditional IPO. Select investment banks are financial advisors to the company in this process.

• An IPO must meet the requirements set forth by the exchange on which they will trade as well as requirements of the Securities and Exchange Commission (SEC).
• Both an IPO and a direct listing are ways for a company to make its shares available for public purchase via a stock exchange.
• A company considers the pros and cons of Direct listing vs IPO  before choosing -the route.
• By contrast, direct listings are priced solely on supply and demand on the date of listing – i.e. resulting in an unpredictable reaction and more volatility.
• “Going public” is an important growth milestone for many companies and a dream of entrepreneurs worldwide.

If on the day of the listing, no employees or investors want to sell their shares, then no transactions will occur. Companies have multiple pathways to becoming a public company under current securities laws, three of which are outlined below. While alternative pathways to IPOs, including SPACs and direct listings, have become popular in recent years, many factors play into which pathway a company chooses. Both a direct listing and an IPO are ways that private companies enter public trading markets. A direct listing, sometimes called a direct public offering (DPO), is a way to abbreviate the normal IPO process for certain companies, provided they meet certain qualifications.

IPOs are the more common choice, especially for larger companies that have the means to work with an underwriter. Direct Listing is the process by which a company goes public by getting listed on an exchange and offering existing shares directly to the open market. Special purpose acquisition companies (SPACs) became all the rage in 2020 after regulators changed some of the rules governing this private-to-public structure. Direct listings, until recently another mostly unused process for going public, have caught investor’s attention after a new listing rule from the New York Stock Exchange.