Direct Listing vs IPO: What’s the Difference?

A private company raises capital by selling newly-issued shares to investment banks , which the banks then sell primarily to institutional investors. In a direct listing, also known as a direct placement, a company lists its shares on an exchange without the use of an investment bank or other intermediary. In a direct listing, insiders sell their shares straight to the public, and the company may decide to raise capital by selling stock, too. But only in 2020 did the Securities & Exchange Commission begin allowing companies to raise capital using a direct listing. 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.

That said, a direct listing may allow the market to more accurately price a stock, because it’s based on true market factors rather than the artificial hype from a team of IPO underwriters. 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. In the 2000s, nearly 30% of a company on average was sold at IPO, whereas today it’s only 16%.

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 process. In a direct listing, a company floats its shares on an exchange without hiring investment banks to underwrite the transaction as an initial public offering. But how a company gets there is what makes a direct listing different from a traditional IPO.

At the end of 2020, the SEC announced changes to its rules surrounding IPOs and direct listings. The alterations now officially let companies raise funds through direct listings instead of only an IPO. The root cause of the criticism stems from the incentive structure of investment banks, where banks will pitch the IPO to raise investor participation and capital.

Market sentiment:

There are no sales, profit, asset or other traditional requirements or qualifications. A direct listing is a way for a private company to go public by offering existing equity to the general market. Direct listing meaningdescribes a method by which privately held companies go public by selling their existing shares to retail and institutional investors rather than issuing new ones. A private company begins to sell shares on the public stock market at a price that they have set without the use of an underwriter, thereby going public.

Therefore, they may be more patient in accumulating positions in the next one. Palantir did include a https://forex-world.net/ on approximately three quarters of their shares to allow for more liquidity than a traditional IPO and to manage the increase in free float better in the early days of trading. The factors that have led to diminishing liquidity from the IPO, however, will persist. Direct listings, with or without a partial lockup, will still be the best way to bring liquidity and efficiency back into the process of going public.

• Some VCs now believe it’s hard to justify giving away millions of dollars in one day.
• This protects the company share price as it prevents the stock market from being flooded with shares unnecessarily.
• This can also help avoid the dilution that issuing new shares could cause.
• An underwriter is an intermediary that works closely with the company during the IPO process and charges a commission for its services.

But if a new DL prices and trades well, many companies could ask themselves if a traditional IPO still makes sense. 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.

From volatility and geopolitics to economic trends and Direct listing vs ipo outlooks, stay informed on the key developments shaping today’s markets. The NYSE has allowed them in the past with companies including Spotify and Slack but was hoping to expand the practice, pending the results of the public comment period on the proposal. Underwriters charge a fee per share, which may range anywhere from 3.5% to 7.0%, based on a sampling of public filings from PwC. Timothy Li is a consultant, accountant, and finance manager with an MBA from USC and over 15 years of corporate finance experience.

Direct Listing: Process and Requirements

You will need to have an account with a broker that has a share allocation and follow the broker’s procedure. There are several regulatory requirements a company needs to follow during an IPO. Before an IPO can proceed the company must submit a detailed registration statement called a form S-1 to the SEC, with up-to-date financials and other information investors need to assess the company’s prospects. The SEC may comment on the statement and request further information before approving the IPO. 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.

It debuted through a direct listing on the New York Stock Exchange and was the first household name to go through the DPO process. The contents of this article/infographic/picture/video are meant solely for information purposes. The information is subject to updation, completion, revision, verification and amendment and the same may change materially.

Direct listings and IPOs: Definitions, similarities, and differences

In addition, the company can only engage in very limited marketing efforts for the securities to potential investors. 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. Besides, worth noting among the direct listing vs IPO pros and cons is the lower price and volatility protection that retail investors get in direct listings.

Although companies are able to tap into a larger variety of investors with an IPO, there is still no guarantee that they will raise the amount of capital they need from this public listing. But the SEC recently announced that companies undergoing a direct listing can now raise capital, helping build the case that direct listings are a preferable alternative to traditional IPOs. Significant amounts of money are also saved in a direct listing by not having to pay IPO fees to investment banks – in part due to the shorter, more efficient process. 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.

• We’ll see all manner of companies considering the direct listing, not just large-cap or consumer-branded private companies.
• Still, recently, companies have shown that DPO is also a good way of raising capital and enjoying benefits without paying much to underwriters and banks.
• Their network comprises investment banks, broker-dealers, mutual funds, and insurance companies.
• “Some companies don’t want to issue new shares and dilute their existing shareholders.
• The trend of direct listings is anticipated to persist, especially considering the number of well-capitalized start-ups that will soon be going public.

Click IPO Securities, LLC is a broker dealer registered with the SEC, and is a member of FINRA and SIPC. Click IPO Holdings, LLC, owner of the proprietary technology application known as ClickIPOTM is the parent company of Click IPO Securities, LLC. The application might not be available in some jurisdictions. Specific securities appearing in educational examples are not a recommendation to buy, sell or hold any security. Setting the IPO price and providing a safeguard if demand is weaker than expected.

How to participate in a DPO

That’s because a direct listing doesn’t involve an underwriter who basically guarantees the share of sales to a body of investors. Instead, a direct listing relies purely on the market forces of supply and demand. However, investment banks are still hired in direct listings, but the degree of involvement is limited to general advisory and oversight.

For an investor, DPOs carry more risk than IPOs because there is less financial information and potential volatility. Companies may choose a DPO to save time and money in going public, especially large, well-known firms. The content on finmasters.com is for educational and informational purposes only and should not be construed as professional financial advice. Finmasters is not a financial institution and does not provide any financial products or services.

Examples of stocks that went public via a direct listing

With the rule changes at the end of 2022, more companies may consider the DL approach. The lack of a lockup requirement will remain very attractive to existing shareholders, and fees could still be lower than those of traditional IPOs. Keep in mind that other fees such as regulatory fees, Premium subscription fees, commissions on trades during extended trading hours, wire transfer fees, and paper statement fees may apply to your brokerage account.

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. Gauging the interest received from network participants helps the underwriters set a realistic IPO price for the stock. Underwriters may also provide a guarantee of sale for a specified number of stocks at the initial price and may also purchase anything in excess. Direct listings are also known as Direct Placement or Direct Public Offerings.

Under the NYSE’s proposal, a direct listing would let both the company and company insiders sell stock at listing, provided that the company sells at least $250 million worth of shares. There are no new lockup requirements, in that insiders can sell shares of the company as soon as it lists rather than wait up to 180 days to do so. Companies that want to do a public listing may not have the resources to pay underwriters, may not want to dilute existing shares by creating new ones, or may want to avoid lockup agreements. Companies with these concerns often choose to proceed by using the direct listing process, rather than an IPO. Two notable companies that have gone public through direct listings are Spotify and Slack.

In September 2021, American analytics software company Amplitude had a direct public offering, reaching a market value of US$7.1 billion in its first day of trading. Some direct public offerings are now being conducted on crowdfunding platform sites. Many companies offer software and services to facilitate electronic DPOs on their websites.

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Financial 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. Traditionally, small companies in industries such as food and biotech have gone public via DPO. If you are already a TD Ameritrade client, you will be able to place trades as soon as the shares are available in the open market.

Use Public features like Instant Transfers to fund your brokerage account and make sure you don’t miss potential opportunities. The risks of direct listings include the absence of these aspects, apart from the fact that there is no underwriter support, promotions, or sale of shares guarantee. Companies participate in IPOs in order to become a publicly traded company, which diversifies ownership and opens them to a wider investor base, and to raise funds for growth. Other examples of tech companies that have used direct listings to go public are job-hosting platform Ziprecruiter and the web service company Squarespace. Another benefit of IPOs is the “greenshoe option.” This will grant the IPO underwriter the option to sell more shares if there is sufficient demand.

We strive to provide up-to-date information but make no warranties regarding the accuracy of our information. Our goal at FinMasters is to make every aspect of your financial life easier. We offer expert-driven advice and resources to help you earn, save and grow your money. Business valuation is extremely tricky as no two companies are the same, and the companies may have limited track records.