Direct listing vs IPO: heres why venture capitalists are starting to prefer direct listings

initial public offering

This helps to generate interest in share sales and enables the underwriter to set a reasonable initial offer price. The underwriter’s fee, often ranging between 3 per cent and 7 per cent per share, consumes a notable chunk of the capital raised. However, the underwriter will usually guarantee that a certain number of shares are sold at the initial offer price, providing a safety net for the company. The most popular way for a company to go public is via an Initial Public Offering , with the alternative option being a Direct Listing.

Bill Gurley says direct listing rule change will end traditional IPOs – CNBC

Bill Gurley says direct listing rule change will end traditional IPOs.

Posted: Tue, 22 Dec 2020 08:00:00 GMT [source]

A traditional initial public offering isn’t the only way for companies to list their shares on a public exchange. Today, companies have several alternate options, including a direct listing, in which only existing shares are sold, and there is no underwriter involvement. Initial public offerings, or IPOs, are a well-traveled road that many companies use to sell shares to the public for the first time. But shorter paths exist, including the direct public offering , also known as a direct listing. This is when a company puts shares directly onto a stock exchange without all the steps required for an IPO.

The new rule should make choosing a direct listing relatively more appealing to companies looking to issue primary shares and not to simply register existing shareholder shares in their initial public listing. The revised rule eliminates the registration statement’s offering range restriction. Going public via a DPO is traditionally faster and cheaper than going public via an IPO. In a traditional IPO, one or more investment banks serve to underwrite the issuing stock. In this role, they manage several aspects for an IPO that add cost to the business and time to go public, but also security to the process.

With a direct listing process , the business sells shares directly to the public without the help of any intermediaries. It does not involve any underwriters or other intermediaries, there are no new shares issued and there is no lockup period. A direct listing is a process for a company to become public without going through the initial public offering process. A typical IPO undergoes a rigorous, months-long vetting process where the company’s finances and business plan are scrutinized by regulators and professional bankers. A direct listing skips the underwriter, and investors could be exposed to an illiquid market, wide-swinging prices, and other undesirable results.

The direct listing process

Companies that use direct listing have different goals than those that choose an IPO. In an IPO, companies are trying to raise capital for expansion or funding. On the other hand, companies that use a direct listing are not necessarily seeking capital. Instead, they are looking for the other benefits of being a public company, such as increased liquidity for existing shareholders.

You need to identify Direct listing vs ipoly listed companies similar to the private entity. So, the public company should ideally be a competitor of a similar size and grow at a comparable rate. An IPO, SPAC, or direct listing are all viable ways for a company to go public.

  • This can be better suited for companies that don’t have the funds to pay for an underwriter or don’t want to dilute their existing shares.
  • Went public on April 3, 2018, using a direct listing, making it one of the more prominent companies to do so.
  • In the direct listing process, the company lists existing shares rather than issue new ones to raise new capital.
  • 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.

In traditional IPOs, though not always required, companies have lock-up periods in which existing shareholders are not allowed to sell their shares in the public market. It prevents an overly large supply in the market that would decrease the price of the stock. The second difference is that in a direct listing there are no underwriters. Underwriters work for investment banks to help sell stocks of a company that is going public. They make large purchases which adds value to companies as those shares are taken off their hands.

Flexibility on the Direct Listing process allows a company to go effective without a waiting period after filing their S-1. Previous listed companies have utilized this feature to opt for an Investor Day in lieu of a Roadshow. Most DPOs do not require registration with the Securities and Exchange Commission because they qualify for an exemption from the federal registration requirements.

In what ways is a Direct Listing different than an IPO?

All of the newly issued shares sold by the company itself must be sold in the opening auction, at one price and at one time. Selling shareholders may also sell in the opening auction if there is demand for additional shares at the opening auction price and may also sell at any time after the opening auction is completed. Recently, NASDAQ has petitioned the United States Securities and Exchange Commission tolift limitson raising capital through the direct public offering and the maximum price at which shares can be traded. It is also worth mentioning that SEC has given the New York Stock Exchange permission to list new shares alongside existing ones from companies seeking direct public offering.

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. The rise of crossover investors and growth equity firms has made capital readily available. Capital stock is the number of common and preferred shares that a company is authorized to issue, and is recorded in shareholders’ equity. The Nasdaq is also reportedly working with the SEC to offer direct listings as well.

initial public

No offer to buy securities can be accepted, and no part of the purchase price can be received, until an offering statement filed with the SEC has been qualified by the SEC. An indication of interest to purchase securities involves no obligation or commitment of any kind. The above content provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. Market and economic views are subject to change without notice and may be untimely when presented here.

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In this article, we break down the differences between, SPACs, and direct listings, their advantages and disadvantages, and why companies looking to go public prefer each option. This could be a lack of guarantee for share sales and the fact that there are no safe long-term investors. 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.

An IPO is far and away the most popular and well-known method for listingpublicly available shares of a company on a public stock exchange. One of the key components of an IPO is the fact that shares are underwritten by an intermediary, and new shares are created for purchase. An underwriter typically takes a percentage of the price of each share, so underwriters can make quite a bit from a single IPO. 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. Upon listing of the company’s stock (whether it’s through a direct listing or an IPO), companies are subject to the reporting and governance requirements applicable to all publicly traded companies. The SEC requires all publicly traded companies to prepare and issue two disclosure-related annual reports—one that is sent to the SEC and one that is sent to the company’s shareholders.

Direct Listing

The direct listing process is also known as direct placement or a direct public offering . Despite the popularity of IPOs, some venture capitalists are now advising start-ups to go for direct listing instead. The venture capitalists claim that direct listings on stock exchanges provide a better alternative to IPOs. The other potentially negative aspect of a direct listing is that initial trading can be more volatile because institutional buyers have not gone through a price discovery process to set the initial IPO price. With a traditional IPO, there’s a book-building process where major investors and institutions set the value of a company at a certain price, creating a benchmark for what that company is worth before it trades. Typically, going public offers a great opportunity to raise money for the business, so companies miss out on that chance when they do a direct listing.


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. A company may be interested in a direct listing if it has a feature that would be less attractive to investors in the traditional IPO route. For example, two stocks that conducted a direct listing in recent years – Slack and Coinbase – both had a dual-share-class structure. This setup gives insiders a special class of stock, providing them many extra votes per share. In effect, this structure helps give insiders control of the company – a setup that many investors dislike. A direct listing also allows insiders to sell their stock immediately on the exchange without the lock-up of shares that is normal in the IPO process.

In many cases the only stock available in a direct listing comes from insiders , so preventing insider sales would stymie the success of the direct listing process. 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. 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.

Guide to D&O Insurance for IPOs and Direct Listings, 2023 Edition – JD Supra

Guide to D&O Insurance for IPOs and Direct Listings, 2023 Edition.

Posted: Wed, 26 Oct 2022 07:00:00 GMT [source]

Or they could bypass the middlemen, belly up to a booth at the local farmer’s market, and hawk their sweet corn, almonds, or peaches directly to the public. What’s best for the company and the investor, an IPO, SPAC, or direct listing? From an investor’s perspective – particularly long-term investors – the health and prospects of the underlying company are more important than the method used to go public. So, if the company raises $1 billion, it will pay between $35 million and $70 million as underwriting fees, which is quite significant.

An IPO vs share’s direct listing have their differences, but both can help a company achieve its goal of raising capital. Yes, direct listings sell shares of a private company, raising capital and going public in the process. A special purpose acquisition company is a publicly traded buyout company that aims to acquire other companies by securing a controlling stake or purchasing them outright. They begin as a private company and then undergo an IPO themselves in order to raise funds for their operations.

  • However, the rules have changed over the years and some companies can now opt for what’s called a direct listing with a capital raise.
  • Our experts have been helping you master your money for over four decades.
  • An IPO is underwritten by savvy banks or brokers rather than being listed by the company.
  • The company witnessed a hike of 9.6% in its share price after opening at $50 against the reference price of $35 on NASDAQ and rising to$54.80.

A direct listing is a process by which a company can go public by selling existing shares instead of offering new ones. Companies that choose to go public using the direct listing method usually have different goals than those that use an initial public offering . VCs believe that the underwriters, which in most cases are investment banks, price shares deliberately low so they can surge on the first day of trading. The surge benefits the institutional clients who buy at the low initial offer price and then flip their shares when the price goes up. Both company executives and the underwriter will present to institutional investors prior to the IPO.

DPO vs IPO: What’s the Difference? – GOBankingRates

DPO vs IPO: What’s the Difference?.

Posted: Tue, 25 May 2021 07:00:00 GMT [source]

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