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. You will also need to pay an underwriter when going with an IPO, and that cost could range from 3% to 7% per share. These underwriters set the price for your stock, but you also need to be wary of the chance they will effectively underprice your shares.

Companies generally still use traditional IPOs because of the added safety. The success of Spotify’s and Slack Technologies’ direct listings have gained media attention. And analysts predict direct listings will become more common for companies going public. 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. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns).

What Is A Direct Listing?

Instead, they leverage their network to promote the stocks and increase sales. This is a period of time that typically follows a traditional IPO, during which existing shareholders can’t sell their shares in the market. This prevents an oversupply in the market, which could decrease the share price, and also gives confidence to new investors that existing investors are not just cashing out.

If demand outstrips supply, the price could rise faster than is warranted, while if the supply of stock exceeds demand, the price could fall. Over time these imbalances can work themselves out, but in the short term they could whipsaw a stock. A company may opt for a direct listing over a traditional IPO for a variety of reasons, but some of the key reasons involve money. Direct listings are cheaper, and if a company does not need capital to fund its operations, then it has little need to sell shares to the public using the IPO process.

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. 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.

Traditional IPO Pros and Cons

The opening price jumped to $165.90, 27% higher than the NYSE reference price. It fluctuated wildly that day and closed at $149.01 per share, still above the reference price but below the opening price. In the past, direct listings were generally only used by small companies who couldn’t afford the underwriters of an IPO, and normally on smaller exchanges.

Spotify seems like it was the OG (though it certainly wasn’t the first) when it had a direct listing in 2018, and Slack chose to go the same route when it went public earlier this year. Nasdaq has been listing directly since 2006, Heller said, pointing agriculture stocks to insurance company Watford Holdings as a direct listing on Nasdaq this year. 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.

FAQ on direct listings and IPOs in the stock market

After a company decides to go public via an IPO, it chooses a lead underwriter to help with the securities registration process and selling of shares to the public. These underwriters perform due diligence to recommend a target price and create new shares of the company. In an IPO, current private shareholders are often locked from trading their shares in a moratorium period. Because the company going public is selling new shares, IPOs help the company raise capital. While the cost of an underwriter can be substantial, they are providing financial expertise and the ability to raise funds that the issuer may not have. It’s usually less expensive for a company to go public via a direct listing than conducting an IPO.

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. Their core goal is to enjoy the perks of a public company, like more liquidity for their shareholders.

• Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens.
• Finally, with a direct listing, there is no temporary lock-up period where company insiders cannot sell additional shares.
• Although direct listings may allow companies to go public more nimbly and at less cost without the use of an intermediary, direct listings presents additional risks compared to traditional IPOs.
• In a direct listing, insiders sell their shares straight to the public, and the company may decide to raise capital by selling stock, too.

Here’s your direct listing explainer, including how the process stacks up to traditional IPOs and what companies have gone public using this alternative method. Plans to directly list Airbnb, a famous unicorn, changed when the company opted for a traditional IPO instead. Other firms that have successfully gone public via direct listing include Coinbase and Roblox. Balancing the needs of existing stakeholders with those of potential shareholders is another intricate task, as differing expectations might arise.

What are the differences in an IPO, a SPAC, and a direct listing?

Direct listing helps companies avoid hefty fees paid to investment banks. It also helps them avoid the indirect cost of selling the stocks at a discount. Initial public offerings and direct listings are two methods for a company to raise capital by listing shares on a public exchange.

Once an IPO or DPO officially goes public, market capitalizations and dollar values are in the hands of the public market. You may be ready to go public, but is your company actually ready? Bob Johnson, founder of https://bigbostrade.com/ BET, on the company’s sale to Viacom for almost $4B and the key skills of entrepreneurship. LIBOR is the world’s most widely used benchmark for short-term rates, but its era of influence is slated to end by 2022.

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.

SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. SmartAsset does not review the ongoing performance of any RIA/IAR, participate in the management of any user’s account by an RIA/IAR or provide advice regarding specific investments. The rise of direct listings (and SPACs) is clearly an effort by market participants to do just that.

Whether a company pursues a traditional IPO or a direct listing, they must file an S-1 with the U.S. Securities and Exchange Commission (SEC) at least 15 days in advance. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. In 1984, Ben and Jerry’s was the first company to use the direct listing method. It couldn’t afford an underwriter and it successfully raised $750,000 through a DLP. Bankrate.com is an independent, advertising-supported publisher and comparison service.

What are the benefits of a direct listing over an IPO?

The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Certain investment banks also take on the risk to sell all shares, which can compel them to lower the offering price to ensure all shares are sold, so they’re not left holding onto too many unsold shares.