Direct Listing vs IPO: What Is the Difference?

MyWallSt Limited does not take your specific needs, investment objectives or financial situation into consideration, and any investments mentioned may not be suitable for you. If you are unsure of any investment decision you should seek a professional financial advisor. MyWallSt Limited is not a registered investment adviser and we do not provide regulated investment advice or recommendations. MyWallSt Limited may provide hyperlinks to web sites operated by third parties. Execution on the day a company makes its debut on the public markets is very much the same for both direct listings and IPOs, Heller said. On the first day of trading, investors watch closely to see what price the stock opens at when the market itself opens for trading, and what price the company closes at when trading closes.

Both those companies that elect to follow the direct listing process and those companies that undergo an IPO must publicly file a registration statement on Form S-1 with the Securities and Exchange Commission at least 15 days in advance of the launch. The direct listing process is also known as direct placement or a direct public offering . 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.

If the company needs to raise $100 million, they don’t know how many shares to sell because the price is going to be hammered by supply and demand. It can be difficult to get a lot of interest for direct listing because like I said, there’s no roadshow, there’s no buildup toward it. If the company isn’t widely known, typically, these are only used by big established brands. These are big companies that people are already interested in investing in.

There’s been talk of Airbnb (another well-known unicorn) doing a direct listing when it goes public in 2020, and startup executives and venture capitalists gathered to discuss the prospect of tech companies going public via direct listings earlier this fall. Setting up roadshows to court investors to raise capital for the offering and divvying up IPO shares to other financial institutions. A DPO and an IPO are similar in that they are both ways a formerly private company can go public and begin to sell shares of stock on the open market. While an IPO is the traditional way companies have gone public in the past, DPOs are increasing in awareness and popularity as large companies like Spotify have chosen to go public this way.

Related Content

They want companies to do what they say they are going to do; actually, they would like companies to do better than expected every quarter. A company should also avoid painting an overly rosy picture or leaning in on guidance when it has just gone public. A direct listing is an innovative broker definition meaning and example 2020 structure that provides companies with an alternative to a traditional IPO in the path to going public. In the lead-up to a DPO, the exchange can provide guidance on a share “reference price.” In an IPO, by contrast, the offering price may not be established until after the road show.

  • The financial advisors assumed clearly defined roles, which included helping Spotify to define objectives for the listing, advising on the registration statement, and assisting in preparing presentations and other public communications.
  • A DPO lets a private company become public, typically without raising new funds, by selling shares directly to the public on an exchange.
  • At the end of the day, investors want to know the facts as well as the risks and the opportunities of the business model as objectively as possible.
  • It’s not dependent on a certain amount of new shares being created.
  • From an investor’s perspective, the difference between an IPO and a direct listing may be minimal.

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. Whether its an IPO, a direct listing, or another route, we’ve helped companies from all over the world to go public.

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. 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.

IPO vs. DPO: How They Differ

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. The path to a direct listing involved many features not usually found in the traditional IPO, the most significant of which are highlighted below. Although a direct listing can be a cheaper, faster way for a company to go public, investors considering these vehicles should be aware of the unique risks. No “road shows.” Companies planning a direct listing don’t need to market their shares to potential investors, as is the case with IPOs. To understand the difference between IPOs and DPOs, think of the company going public as you would a farmer selling their harvest.

  • Following an IPO, there is a so-called “IPO pop” in which the shares of a newly listed company surge on the first date of trading.
  • This means that a significant portion, sometimes totaling in the hundreds of millions, of the capital raised goes to intermediaries.
  • An IPO also often serves as an exit strategy for early investors, founders, or venture capitalists who funded the company while it was still private.
  • Going public through reverse merger with a SPAC therefore kills two birds with one stone.
  • An SEC approval is still necessary for a DPO, and companies need to register with the agency.
  • Palantir did include a lockup 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.

He oversees editorial coverage of banking, investing, the economy and all things money. The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we 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.

What is an ETF and Should You Invest in One?

The SEC appears to have gotten more reasonable in their list of follow-up questions , saving additional time as well. If companies spend more upfront time in the education process, the banker role becomes easier, too. (Note that these fees are also used to cover banks’ research costs, so they can’t go down by that much.) The more banks on the cover of the S-1, the higher this fee should be. With all the efficiencies being created in the marketplace today, I think the traditional costs of going public should be rationalized by 20-30%.

Investing can be tedious, so it pays to have someone in your corner helping you call the shots. SmartAsset’s free tool matches you with up to three financial advisors in your area in only five minutes. If you’re ready to be matched with a local advisor, get started now. “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. Slack, Roblox, and Spotify, listed on the NYSE, ranked among the largest opening trades in the history of the US markets. Regulation SHO Threshold securities listed for every settlement day.

  • Open to Public Investing is a wholly-owned subsidiary of Public Holdings Inc. (“Public Holdings”).
  • Securities and Exchange Commission gave the New York Stock Exchange approval for direct listings.
  • That’s just a really good example of how direct listings really level the playing field.
  • 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.
  • With IPOs, the company uses the services of intermediaries called underwriters, who facilitate the IPO process and charge a commission for their work.

Use SmartAsset’s investment calculatorto determine what kinds of returns you need to earn to make your goals a reality. IPOs come with some disadvantages though, as the underwriter charges a fee per share which can range from 3% to 7%. This means that a significant portion, sometimes totaling in the hundreds of millions, of the capital raised goes to intermediaries. Large private equity firms likeTPGandThe Carlyle Grouphave acted as sponsors in the SPAC market. Household brands likeHostessor newer companies likeDraftKingshave gone public by merging with SPACs.

Traditional Initial Public Offering (IPO)

Unlike previous years, the hot IPO market in 2020 was fueled in large part by the surge in Special Purpose Acquisition Companies , also known as blank check companies, which represented about half of the number of IPOs and the amount of proceeds raised. The direct listing process is straightforward in that the company’s shares begin trading on an exchange, with no shares pre-negotiated and sold to institutional investors at a designated price. A special purpose acquisition company represents the most fibonacci number complex type of fundraising for new companies. A SPAC is a company that has no commercial operations and is strictly formed to raise capital through an initial public offering for the purpose of acquiring an existing company. A special purpose acquisition company is a publicly-traded buyout company that raises capital through an IPO in order to purchase or gain a controlling stake in a company. SPACs are also known as blank check companies because the target company is unknown at the time of the IPO.

difference between direct listing and ipo

In turn, this helps raise even more capital for the company that’s going public. MyWallSt is a publisher and a technology platform, not a registered broker-dealer or registered investment adviser, and does not provide investment advice. All information provided by MyWallSt Limited is of a general nature for information and education purposes, and you should not construe any such information as investment advice.

Investors need to be educated and have a clear understanding of the company’s business model. Every company should spend the necessary time educating the market about what they do and the potential top indicators for a scalping trading strategy long-term opportunity. These meetings are designed to help the underwriters build an order book of indications of interest from investors, which helps them gauge the level of demand for a stock.

This makes a DPO a potentially riskier route than an IPO as there could be more volatility and market swings. Direct listings are an alternative to Initial Public Offerings in which a company does not work with an investment bank to underwrite the issuing of stock. While forgoing the safety net of an underwriter provides a company with a quicker, less expensive way to raise capital, the opening stock price will be completely subject to market demand and potential market swings. As we’ve seen above, the significant difference between a direct listing and an IPO is the shares offered.

Which Companies Have Listed Directly?

No longer do companies need to spend nights with their accountants, lawyers, and bankers at the printer; today, this can all be done online. In my opinion, there are pros and cons of both options; what really matters is how you price the transaction, keeping in mind that the best overall IPOs create a win-win opportunity for both existing and new shareholders. In the past, the traditional IPO was the most common way to do this, but recently a few larger, well-known brands, notably Spotify and Slack, have opted for the direct listing. I’ve had the privilege of working through two IPOs — first as the VP of Finance with Box, and more recently as CFO of Smartsheet. The intraday volatility on the first day of trading for three other high-profile technology company IPOs was 15.6%, 34.7%, and 48.1%.


Sign up for our Newsletter