direct listing vs ipo

We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money. Banking services and bank accounts are offered by Jiko Bank, a division of Mid-Central National Bank, Member FDIC. You can find a lot of these answers by listening in on Public Townhall in-app events, where you can listen to c-suites share info about their public (or soon-to-be-public) company. The opening auctions that sit at the heart of pricing Direct Listings are sizable and complex transactions. The NYSE’s unique market model, built on the fact that stocks trade best when human oversight and accountability are integrated with world class technology, allows us to flawlessly execute such transactions.

direct listing vs ipo

A private company becomes public, typically without raising new funds in the process, by allowing existing shareholders to sell shares directly to the public. In comparison to IPOs, DPOs offer a less expensive alternative to share listing. What a direct listing is not offering is the listing assurances that underwriters provide in IPOs.

Direct Listing

Prior to the IPO, the company and its underwriter partake in what’s known as a “roadshow,” in which the top executives present to institutional investors in order to drum up interest in purchasing the soon-to-be public stock. In a direct listing, companies do not issue new shares or raise additional capital. For businesses seeking to fund growth initiatives, a direct listing may not be the most suitable option.

direct listing vs ipo

Like DPOs, SPACS really started drawing interest from the investment community only recently. As entrepreneurs, investors and regulators have gained familiarity with the direct listing process and its advantages over traditional IPOs, there have been additional changes in practice and regulations. Whether its an IPO, a direct listing, or another route, we’ve helped companies from all over the world to go public.

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Companies who choose to go public via a direct listing often seek a level of liquidity that an IPO cannot provide. It’s a faster, cheaper route to go public compared to the long, expensive IPO process. A key distinguishing aspect of the Direct Listing versus a traditional IPO is that pricing occurs during the opening auction. Accordingly, in a Direct Listing, the company captures the full value of the initial stock sale at the same time as the opening auction. Thus, it is exposed to the full risk and rewards of the initial stock sale when conducting a Direct Listing. Direct Listing rules were first updated to allow capital raising in December of 2020.

We could see public investors becoming more active in buying shares of a private company ahead of its direct listing to establish positions earlier. Direct listings provides existing shareholders with immediate access to liquidity, as there is no dilution of ownership and no lock-up period for insiders by default. This feature is particularly attractive to employees and early investors who may want to sell their shares without restrictions.

direct listing vs ipo

Unlike an IPO in which the share price is negotiated beforehand, in a direct listing the price of the stock depends solely on supply and demand. This increases volatility, as the range in which the stock is traded is less predictable. All four direct listings to date have had vastly bigger free floats compared to IPOs constrained by lock-ups. The abundance of liquidity allowed public shareholders to build larger positions much more quickly. The four direct listings have not experienced the liquidity-constrained price dynamics that similar IPOs have.

The bottom line on direct listing

Make sure to communicate with employees and other shareholders about what’s happening, especially with their equity. You should try to explain it to them as soon as the equity plan is ready to go public because many people are unaware of what they can and can’t do with their shares during a direct listing and IPO. A SPAC goes public as a shell company using an IPO for the purpose of merging with or acquiring a yet-to-be-identified private operating company. Generally within two years, the SPAC combines with the private company via a de-SPAC merger, with the resulting company becoming public and receiving a combination of the SPAC’s IPO proceeds and additional capital from a private financing.

IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. IPOs take steps to ensure shareholder protection by bringing in long-term investors. Price volatility is insulated through large shareholders during the listing process. A company considers the pros and cons of Direct listing vs IPO  before choosing -the route.

This can result in unpredictable stock price movements and potential challenges in establishing a stable market for the shares. Direct listings can also provide a more transparent and efficient way for companies to go public, as the market sets the share price based on supply and demand. However, direct listings can also be riskier than IPOs, as there is no price stabilization or lock-up period for existing shareholders.

These two things combined increase the number of people who are interested in investing in the company. 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.

Price Discovery and Opening Day Trading

The day-one trading for employees can be seen as a huge benefit, but having everything ready to go from the first day on the exchange is a highly time-consuming and complex affair. Firstly, IPOs are geared towards raising capital, and while it’s common for companies going through a direct listing to raising capital either shortly before or shortly after the listing, it’s usually not the main objective. The transaction costs, including underwriter fees, are high, and the process typically takes a long time. Thus, the difference between IPO and share’s direct listing is influential in the listing decision of companies going public and the investments made by share buyers. In a direct listing, the company is not required to involve any intermediaries to sell their existing stocks. In the IPO process, new shares of the company are created, which are underwritten by investment bankers.

On December 6, 2019, the SEC rejected the NYSE’s proposal, although the NYSE says it will continue trying to appeal the decision. The Nasdaq is also reportedly working with the SEC to offer direct listings as well. While the safety of an underwritten public listing may be the best choice for some companies, others see more benefits with a direct listing. Ultimately, the choice between a direct listing and a traditional IPO depends on a company’s specific circumstances and goals. Direct listings can result in a limited investor base, as there are no guaranteed institutional investors, and attracting retail investors can be challenging.

But many companies considered the accompanying requirements too cumbersome and risky. The structure attracted the attention of other technology companies with well-known consumer brands, many existing investors and high valuations. Several other notable tech companies followed this path, although there were some differences — one company used a voluntary lockup, for instance. The SPAC IPO share price is standardized at $10, and SPACs must keep their IPO proceeds in interest-bearing trust accounts. Because the SPAC’s sponsors are not required to declare the acquisition target at the IPO, SPAC investors have the right to withdraw their funds, plus interest, from the company if they don’t approve of the acquisition.

So although it may help to speed up the listing process, it creates a certain level of ambiguity around share price opening and allocation. A traditional IPO provides more security, as it nearly guarantees investors will buy up shares when they become available. It also usually keeps a handful of investors from selling within a short period of time. However, investment banks are still hired in direct listings, but the degree of involvement is limited to general advisory and oversight. With a traditional IPO, the team of underwriters also “hype” a stock to generate interest among the investing public and help it sell well.

Unfortunately, it was of little help; no direct listings were registered during the first two months of 2023. If you’re doing an direct listing or IPO, consider creating a written FAQ about timing, lockup periods, and other relevant guidelines. Inform and educate employees that they can’t sell immediately and will have to adhere to lockup periods (for an IPO) that are often 90 days long.

This happens through a single order, which is executed as part of the opening auction. Day 1 TradingWith the unique market model able to execute such an offering, NYSE Direct Listings have traded with superior market quality in both lower volatility and tighter spreads on Day 1 compared to IPOs. Financial Advisor RolesFinancial advisors are not required to underwrite an initial price like a traditional IPO, but they are essential in consulting alongside with the NYSE to set the reference price for Day 1. The lifespan of a SPAC is limited to two years, at the end of which it must have either completed its acquisition, sometimes called a business combination. Even after the simplification, there were several different types of DPO, each with different rules about allowed investor classes, capital raising limits, and trading.

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. Alibaba is one company that used the traditional IPO process in 2014 and raised $21.77 billion, making it the largest IPO to date.10 The underwriters for large IPOs are also very well compensated. If, for example, the Alibaba underwriters got 7%, they would have earned over $1.5 million. The transparency created by reporting requirements for publicly traded companies adds to the company’s operating overhead and may require disclosing sensitive business information that competitors could leverage. There’s also no guarantee that the IPO will raise the desired amount of capital, although that’s one of the things that underwriters strive to ensure.

In many cases the only stock available in a direct listing comes from insiders (and not from a company selling shares), so preventing insider sales would stymie the success of the direct listing process. A company may opt for a direct listing over a traditional IPO for a variety of reasons, but some of the key reasons involve money. Direct listings are cheaper, and if a company does not need capital to fund its operations, then it has little need to sell shares to the public using the IPO process.

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