Direct Listing vs IPO: What’s the Difference?

One of the main differences between a direct listing vs IPO is that through a traditional IPO, a company issues new shares of its stock, while companies that choose direct listings sell only existing shares. Companies that pursue direct listings are generally not focused on raising additional capital, which is why they do not need to issue new shares. Its sole purpose is to find a target operating company to acquire or merge with within a defined timeframe, usually two years. The second step is usually achieved by structuring the transaction, referred to as the De-SPAC process, as a reverse merger in which the target company merges with and into a subsidiary of the SPAC. Following the acquisition or merger, the target company becomes a publicly traded company.

The traditional initial public offering model has been disrupted by the emergence of direct listings, in which a company starts selling shares directly to the public. In a direct listing, the company sells shares directly to the public without the help of any intermediaries, which means it saves on fees compared to an IPO. In addition to this, companies that opt for the direct listing process also tend to avoid the usual IPO restrictions such as lockup periods, which prevent insiders from selling their shares for a specified period of time. Furthermore, a company can avoid diluting any existing shares since no new shares will be created in the process.

Traditional Initial Public Offering (IPO)

An IPO sells stock in the company, typically with the intent to raise money for the company. Since Spotify first announced its intention to become a public company using this groundbreaking and innovative structure, it has generated enormous interest from the financial press and market participants. With all the efficiencies being created in the marketplace today, I think the traditional costs of going public should be rationalized by 20-30%. No longer do companies need to spend nights with their accountants, lawyers, and bankers at the printer; today, this can all be done online. To raise capital and is mostly preferred by small and medium-sized businesses. Experts, however, don’t know if a trend toward direct listing companies exists presently, or will eventually.

• In an IPO, banks underwrite the sale of shares, pocketing as much as 7% of proceeds, whereas in a direct listing they merely act as advisors—with a smaller total cut.
• Although direct listings could be considered easier in terms of what’s involved, it’s still a complex topic.
• Further, once a company has completed its Direct Listing, it will have to make all SEC-required ongoing public company disclosures, including annual reports and proxy filings.
• A company should also avoid painting an overly rosy picture or leaning in on guidance when it has just gone public.

With a traditional IPO, the team of underwriters also “hype” a stock to generate interest among the investing public and help it sell well. But working with an investment bank is certainly no guarantee of success, and the high-profile IPO of Facebook in 2012 saw the stock decline precipitously before going on to good returns in later years. Because it avoids the underwriters and most other financial intermediaries, a direct listing can be done much cheaper. In the largest IPOs, it may cost hundreds of millions of dollars for the company to go public. Since new shares are sold to the public, an IPO often dilutes the ownership share of existing investors in the company. Well-connected investors – including the underwriter’s best clients and large institutional investors – usually get preferential access to buying stock as part of the IPO.

Direct listings may also allow companies to go public without diluting their private investors’ interest in the company, if the company itself does not raise capital in the listing. In a typical IPO, the underwriters take representatives from the company on a one or two-week “road show”, a series of group meetings with buy-side institutional investors, and one-on-one meetings with large institutional investors. Retail investors are offered a video recording of the road show, which is made freely available on the internet. On the other hand, in an IPO, pricing discounts demonstrate incredible volatility and can be as high as 80%. Bankers work for both buyers and sellers trying to strike a balance between giving buyers an appropriate discount for risk, and giving sellers a reasonable price with which to raise capital. Some market observers feel if Asana and Palantir succeed with the direct listing route, they could open the doors for other private companies looking to make their way to stock markets.

Q: What is a direct listing vs. IPO?

When a company goes public via an IPO, the underwriters distribute shares among select brokerages who then impose restrictions on who is allowed to participate in the IPO. On the other hand, since direct listings don’t use an underwriter, the availability of the stock and the price of the stock can create more volatility. For example, since no new shares are made, no stock sale will occur if employees decide not to sell their shares of stock.

For the general public, both IPOs and direct listings are risky investments. The process makes existing stock owned by employees and/or investors available for the public to buy and does not require underwriters or a lock-up period. A direct listing can be a faster, more efficient way for a company to go public by avoiding the underwriter that an IPO must have.

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. Spotify’s management would play no role in initial pricing, it was not possible to include this disclosure in the preliminary prospectus. However, Spotify could not conduct investor education without an appropriate preliminary prospectus. The solution was to rely on the instructions to Item 501 of Regulation S-K to explain how the price would be determined.

Two methods for doing both are directly listing shares on a public exchange or participating in an initial public offering . Brokerage services for alternative assets available on Public are offered by Dalmore Group, LLC (“Dalmore”), member of FINRA & SIPC. “Alternative assets,” as the term is used at Public, are over-the-counter equity securities that have been issued pursuant to Regulation A of the Securities Act of (“Regulation A”). These investments are speculative, involve substantial risks , and are not FDIC or SIPC insured. The issuers of these securities may be an affiliate of Public, and Public may earn fees when you purchase or sell Alternative Assets.

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. “It’s really do you need capital or do you not, and if you do need capital then a direct listing is probably not for you,” Heller said.

Savings that go beyond commission-free trades

The coverage limits provide protection for securities and cash up to an aggregate of $150 million, subject to maximum limits of $37.5 million for any one customer’s securities and $900,000 for any one customer’s cash. Similar to SIPC protection, this additional insurance does not protect against a loss in the market value of securities. Ultimately, these shares become available xabcd tradingview to the general public based on the per-share valuation deduced on the secondary market. Technology companies going public don’t need as much capital as before. The subscription model for software has taken capital expenditure and made it operating expenditure and they don’t need the same level of infrastructure with the advent of public cloud computing technology.

• Commission-free trading of stocks and ETFs refers to $0 commissions for Open to the Public Investing self-directed individual cash brokerage accounts that trade the U.S.-listed, registered securities electronically.
• The freedom given to employees in the form of liquidity can be considered a benefit and for some, a disadvantage, depending on what way you look at it.
• Despite these risks, direct listings do carry the potential of rewards.
• For the pros, direct listings are typically less expensive than IPOs and SPACs.
• The Investor Day was streamed live to anyone with interest and an internet connection.

Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. A “red herring” prospectus meeting the requirements of Section 10 of the Securities Act is required in order for an issuer to make written offers and, subject to certain exceptions, use an FWP. As a result, prior to commencing a road show in a traditional IPO or, in Spotify’s case, holding its Investor Day, the issuer must have filed a Section 10 prospectus.

It also usually keeps a handful of investors from selling within a short period of time. Direct listings are a better deal for regular people, who aren’t at a disadvantage compared to institutional investors, who get to buy shares at the offer price the night before an IPO. Despite the low-cost advantage, SPACs can be risky because investors have the right to withdraw their investments if they’re unsatisfied with the target company. Even though the management team has incentive to identify the best acquisition (they do retain a 20 percent finder’s fee after all), they still bear the risk of losing investors. If too many shareholders retract their capital, the SPAC may pull out of the deal.

Cons of Direct Listing

UnderwritersThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there. The process allows retail and institutional investors to purchase the company and employee-owned equities without a lock-up period. In traditional IPOs, the share price is pre-negotiated upon gauging investor appetite prior to the company going public. Since direct listings are a relatively new development, the process can be riskier, especially for companies that lack the proper guidance on legal considerations and other complexities.

A company goes public when its stock is sold to public market investors for the first time and the value of the entire company is determined when it begins trading on a public exchange. 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. As a result, in order to amend its rules to permit the direct listing of a company like Spotify, in March 2017, the NYSE began the formal rule filing process with the SEC.

It’s possible this risk is enhanced further with a direct listing, if only due to the fact that the process of going public is rooted more in liquidity of existing shares than it is in gaining capital from new investors. Also, price per share of a direct listing depends on market supply and demand, zacks best stocks under $5 which can be really good or really bad for investors. Without an underwriter, a company’s existing shareholders take on great risk. The business needs to be willing to bear this weight, and they ought to be confident that the general public will hop on the bandwagon before market close.

The initial IPO price is set by underwriters, and the underwriters typically have methods to help prop up the stock price in the days after the IPO. Spotify held its Investor Day on March 15, 2018 after the first public filing of its registration statement on February 28, 2018. The Investor Day lasted just more than two hours, about twice as long as a traditional IPO group meeting, and involved presentations gartley pattern definition from Spotify’s entire leadership team rather than just the Chief Executive Officer and Chief Financial Officer. The Investor Day was streamed live to anyone with interest and an internet connection. Since the financial advisors did not participate in investor meetings with Spotify, Spotify relied on the strength of its internal investor relations team to lead the investor education effort.

This means that a significant portion, sometimes totaling in the hundreds of millions, of the capital raised goes to intermediaries. Getting the best return on your stock investments is what Horizon is all about, giving you access to a world class investor and how he invests his own money. SmartAsset Advisors, LLC («SmartAsset»), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S.