What Is Direct Listing?

This strategy is often used as an alternative to an initial public offering (IPO) by companies with substantial brand value, goodwill, and goals other than raising capital. It means they will not have to issue new shares or pay any fees to raise funds, making it a more cost-effective way to go public than an IPO. Furthermore, it improves liquidity and volatility in the open market for existing shareholders (employees or investors).

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Key Takeaways

  • Direct listing meaning describes a method by which privately held companies go public by selling their existing shares to retail and institutional investors rather than issuing new ones.The process allows retail and institutional investors to purchase the company and employee-owned equities without a lock-up period.Companies that cannot afford to pay underwriters often choose this option. It improves shareholder liquidity and volatility in the open market and is less expensive than an IPO.The issuing company sets the parameters, such as the price and period of the offering, the minimum investment, the amount of shares an investor can buy, and the settlement date.

How Does Direct Listing Works?

The direct listing enables companies to go public by listing securities on stock exchanges and issuing them directly to the public. It is an alternative to IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more to raise capital and is mostly preferred by small and medium-sized businesses.

In general, a private firm following this approach has distinct business goals. It also looks for various benefits of becoming a public company, such as increased liquidity and volatility for existing shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more. Moreover, the entire process eliminates any intermediary, so companies do not have to pay hefty charges to investment banks or underwritersUnderwritersThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there.read more. Instead, businesses must employ an investment bank as a financial advisor to handle regulatory filings, price discovery, securities law compliance, and investor communication before listing shares on stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more.

Additionally, companies save themselves from the indirect cost of discount selling their stocks. Only the company shareholders (employees and initial investors) ensure the demand and availability of shares on the stock exchange. If they do not wish to sell their stocks after getting listed on stock exchanges, there will be no transactions.

On the contrary, a company willing to go public through direct public offering must understand and satisfy specific benchmarks. Since there are no underwriters, the firm must have reputation and brand value, an easy-to-understand business structure, and a sophisticated revenue model. It will make investors indulge in buying the direct listing stocks on the listing date.

Recently, NASDAQ has petitioned the United States Securities and Exchange Commission (SEC) to lift limits on 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.

Benefits of Direct Listing

  • Allows firms to go public and directly raise capital from investors or shareholders rather than middlemen, like financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more, banks, venture capitalsVenture CapitalsVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. read more, etc.Removes costs associated with fundraisingIssuers determine terms, including the offering price and period, the minimum investment, the number of shares an investor can purchase, and the settlement dateCompanies can offer common stocksCommon StocksCommon stocks are the number of shares of a company and are found in the balance sheet. It is calculated by subtracting retained earnings from total equity.read more and preferred stocksPreferred StocksA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more, real estate investment trusts, and debt securitiesFrees firms from bank restrictions

Direct Listing Examples

Take a look at the following direct listing examples to see how businesses are using them:

Example #1

Slack and Spotify are two well-known companies to use the direct public offering strategy. Slack is a proprietary communication application developed by the American firm Slack Technologies. On the other hand, Spotify is a media streaming service application from the Swedish company Spotify Technology SA.

The slack stock opened at $38.50 per share, up 48% from the reference price of $26 per share on its public debut on the New York Stock Exchange (NYSE). On their first day of trading on the NYSE, Spotify shares opened at $165.90, up over 26% from the reference price of $132.

These companies have set an outstanding example, demonstrating that companies may collect significant cash even with the less common direct public offering option.

Example #2

Another example is data analytics firm Amplitude Inc., which has a market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more of almost $7 billion after going public through a direct public offering. 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.

Direct Listing vs IPO

Both methods of going public are becoming more common as new companies and start-ups emerge. At the same time, the debate over direct listing vs IPO is an important consideration. So let us look at those:

This has been a guide to direct listing and its meaning. Here we discuss how does direct listing work, along with examples, benefits, and differences from IPOs. You may learn more about financing from the following articles –

A direct listing method or direct public offering (DPO) or direct placement directly lists private companies on the stock exchange. The other process is an IPO, which is quite popular among investors. 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.

Any stock exchange, like NASDAQ and NYSE, reports a reference price for the company’s stock before listing it. This reference price gives investors an idea about the stock’s price range. It is calculated based on various factors, such as the company’s performance, market valuation, competitors, and financial reports.

Unlike IPO, there is no application process in the direct listing. There is no lot and bid that an investor can place. They can only buy stocks after they are listed on the stock exchange, not before that.

  • DelistingDelistingDelisting is the process of removing a security from a stock exchange so that it can no longer be traded on that market. It can occur for a variety of reasons, including non-compliance with listing rules or norms, mergers, or bankruptcy.read moreCoinbase IPOCoinbase IPOOn April 14, 2021, Cryptocurrency exchange Coinbase reached a new milestone by getting itself listed on the Nasdaq Stock Exchange. Trading under the ticker “Coin”, the company did not opt for a standard initial public offering (IPO). Instead, Coinbase’s shares were listed directly on the stock exchange at a reference price of $250. Our experts have once again built an in-depth free IPO financial model for Coinbase. It is designed to help you grasp the mechanics with much simplicity and ease.read morePre IPOPre IPOA pre-IPO is a placement method whereby the company offers its stocks in large blocks to the private investors at a discounted price before these shares are listed on the stock exchange for public trading. read more