Direct listing vs IPO: Which should you invest in?

Some of the companies that have successfully gone public via direct listings include Slack and Spotify. Direct listings allow a company to raise money to go public without the hassle and cost of a traditional IPO. Going public without an underwriter can put a company at higher share price risk. This is because banks can help build investor interest for an IPO.

• The content created by our editorial staff is objective, factual, and not influenced by our advertisers.
• One of the best examples of a firm that went public through direct listing would be Spotify.
• Consequently, underwriters can be a costly component of the going-public process.
• Both an IPO and direct listing have the same end goal, which is…to help a company raise interest-free money from public investors.
• This means that a notable portion of the capital raised through the IPO goes to compensate intermediaries, sometimes totaling in the hundreds of millions per IPO.

A popular example of a company that went public via a direct listing is Spotify. It began trading on the New York Stock Exchange as Spotify (SPOT) on April 3, 2018. The opening price jumped to $165.90, 27% higher than the NYSE reference price.

Pros Of An IPO

The ability to purchase stocks at the IPO price gives investors an attractive deal. Some IPO prices increase after they become available for the public market. Before the IPO, an organization and its underwriter participate in a roadshow. The chief principals perform to institutional investors to convince them to buy the soon-to-go public stock. While there are several differences between a direct listing vs IPO, both paths lead to the public market. That means that once the company is public – regardless of which method it used to get there – it is bound by the regulations and requirements of the SEC, including financial disclosure, and annual reports.

They do not take the company on a roadshow, and they do not set the price. Maintaining sustainable growth post-IPO is crucial to justify investor confidence and manage market expectations. Overall, while an IPO can provide access to capital and liquidity, these challenges underscore the importance of strategic planning and a clear understanding of the complex landscape in which companies go public. Companies generally still use traditional IPOs because of the added safety.

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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. 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. In particular, technology startups have been leading the movement towards going public through direct listings as opposed to traditional IPOs.

Transitioning LIBOR: What It Means for Investors

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. This listing rule allows companies to sell new shares, not just existing shares, via direct listing, something that previously was not allowed. Direct listings and IPOs are different, and some companies may be better off using one or the other when going public. The rule tends to be that direct listings are better for companies that have solid brand recognition, but don’t have a dire need to raise capital.

But before you can invest in these companies, their stocks need to trade on a public exchange. This can take some time even after the IPO has closed.What companies are expected to go public via IPO in 2022? This process skips the bank-backing steps of a traditional initial public offering. Existing stock owned by employees and investors is listed on the exchange. A future challenge is that people are still trying to understand the behavior of both sellers and buyers in this process and the effects of unfettered liquidity on trading. Public investors have noticed how highly liquid the two direct listings have been.

Does a direct listing raise money?

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The dilutive impact is kept to a minimum in a direct listing since no new capital is raised – albeit new stock trader salary in india regulations have changed the rules regarding new capital raising. (SPOT) went public on April 3, 2018, using a direct listing, making it one of the more prominent companies to do so.

The first obvious benefit of a direct listing is that it is cheaper than an IPO. You don’t have any underwriters to pay, which can potentially save your business quite a bit of money. Nasdaq doesn’t have a preference either way a company goes public, Heller said, and it will support corporate pre-listing, the day of, and after it goes public. But companies need to do their research and choose the path that will set them up for success in the future. Both ways of going public achieve the same thing (bringing a private company to public investors) but there are key differences between the two. The rise of direct listings (and SPACs) is clearly an effort by market participants to do just that.

If you are going public to expand your business, that makes this an attractive choice. The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we https://1investing.in/ publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Get instant access to video lessons taught by experienced investment bankers.

Because the price of a direct listing is entirely based on supply and demand, it can be difficult to predict the range at which the stock is traded. The underwriters of an IPO negotiate a price with the company before investors can buy shares. Companies often choose between a direct listing vs. IPO to go public. Recent SEC rule changes have increased the popularity of direct listings. Now, companies can raise new capital by listing existing shares directly on the market.

But when it comes to stock value, there are no guarantees that stocks will retain their initial value on a long enough timeline. In short, direct listing allows you to sell shares of your company to the public without any assistance. That means no underwriter to act as an intermediary, which has both pros and cons (more on this later). Direct listings have benefits like no lockup periods (a time restriction preventing early shareholders from selling stock), but they also have challenges like liquidity and potential volatility, Heller said. Direct listings present most of the same risks to the investor as traditional IPOs. For investors, an IPO has a specified price determined by the underwriters.

This increases volatility, as the range in which the stock is traded is less predictable. If you’re looking at investing in newly public companies, another popular option is buying a special purpose acquisition company, or SPAC. Also known as “blank-check companies,” SPACs have cash and are looking to buy a stake in a business and take it public.

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 direct listings, existing shareholders can sell their shares right when the company goes public. Since no new shares are issued, transactions will only occur if existing shareholders sell their shares. The major difference between a direct listing and an IPO is that one sells existing stocks while the other issues new stock shares. In a direct listing, employees and investors sell their existing stocks to the public. In an IPO, a company sells part of the company by issuing new stocks.