On the surface, a direct listingor a direct public offering (DPO)looks a lot like an initial public offering (IPO).
But theyre not the same beast.
Heres your direct listing explainer, including how the process stacks up to traditional IPOs and what companies have gone public using this alternative method.
Table of Contents:
- Direct listings & IPOs: Definitions, similarities, and differences
- Why some companies choose a direct listing over a traditional IPO
- Is direct listing a better investment than an IPO? Opportunities and risks for shareholders
- Stocks that went public via a direct listing
- Bottom line: DPOs are their own kind of listing
- FAQ on direct listings and IPOs in the stock market
Direct listings and IPOs: Definitions, similarities, and differences
A direct listing is a way for a private company to go public by offering existing equity to the general market.
An IPO allows a company to go public by offering brand-new shares. Underwriters (aka investment banks) facilitate this process.
How theyre different:
Banks underwrite IPOs but do not underwrite direct listings. In DPOs, existing shareholders (like employees) sell their stock on the secondary market. Here, preferred investors price the stock, giving it a value for the general public.
To determine an IPO share price, a companys underwriters go through an IPO roadshow and price discovery. During this time (typically a few weeks), underwriters court investors.
New IPO shares go through a lockup period where investors cant sell shares of the company for a period of time, typically 36 months.
DPOs have no lockup period. Because of this, direct listings provide more liquidity.
Historically, IPOs are more common than direct listings.
How theyre similar:
Both an IPO and direct listing have the same end goal, which isto help a company raise interest-free money from public investors. Ultimately, both methods take a private company public.
Once an IPO or DPO officially goes public, market capitalizations and dollar values are in the hands of the public market.
Why do some companies choose a direct listing over a traditional IPO?
Companies who choose to go public via a direct listing often seek a level of liquidity that an IPO cannot provide. Its a faster, cheaper route to go public compared to the long, expensive IPO process.
Is a direct listing a better investment than an IPO? Opportunities and risks for shareholders
A companys existing investors take on more risk without an underwriter, and the business must be willing to bear this weight. However, direct listings do employ investment bankers under the label of financial advisors. This guidance may potentially improve the companys chances of success once it debuts on Wall Street.
Popularity goes a long way in a direct listing. Small companies have taken the direct listing path in the past, but household names are more likely to do well. This is because theres no roadshow in the direct listing process to price stock through in-the-know institutional investors.
Because theres no lockup period, the stock holds greater potential of experiencing volatility early on.
The Council of Institutional Investors argues that investors may have fewer legal protections with direct listings as opposed to IPOs.
Being an informed investor who targets companies that are transparent with financial data may help.
How have they performed in recent years? Whats their fundraising history? For a direct listing, why dont they want to pay underwriting fees? Are they in debt? These questions and more may lead you to making an educated investment
As a social investing app, Public provides financials for some of the well known publicly traded companies at your fingertips, so you can review stock-specific data and insights.
You can find a lot of these answers by listening in on Public Townhall in-app events, where you can listen to c-suites share info about their public (or soon-to-be-public) company.
Examples of stocks that went public via a direct listing
- Spotify (SPOT) went public in 2018. It debuted through a direct listing on the New York Stock Exchange and was the first household name to go through the DPO process.
- Slack took the direct listing route in 2019 under the ticker symbol WORK. In 2021, Salesforce (CRM) acquired Slack for $27.7 billion, ultimately absorbing WORK stock under its own publicly traded moniker.
- Palantir (PLTR) became a public company via a DPO in 2020.
- Asana (ASAN) debuted through a direct listing on the NYSE in 2020.
- Roblox (RBLX) debuted its direct listing stock in 2021.
- Coinbase (COIN) went public in 2021 and became the largest direct listing ever.
- Warby Parker (WRBY) went public in 2021.
- Want to keep tabs on the latest IPOs and DPOs? IPO Investing is coming soon to the Public app, helping investors like you participate in the IPO process.
Bottom line: DPOs are their own kind of listing
In our view, as companies continue to use direct listings as an avenue to the public domain, its key for investors to know the DPO details. Direct listings, a more liquid way to go public than traditional IPOs, have value in the stock market. For experienced investors and beginner investors alike, just know there are always risks and opportunities in any investment. (Thats not to mention the massive role that market conditions play.) The more you know, the better!
FAQ on direct listings and IPOs in the stock market
Is a direct listing better than an IPO?
Direct listings and IPOs have unique pros and cons to each of them. One is not necessarily better than the other, and each has volatility concerns in the early days. Rather than labeling an investment good or bad simply by its method of going public, many investors focus more on financials.
Why would a company do a direct listing?
Direct listings help companies avoid those pricey underwriting fees. Investment banks typically charge 3.57% of gross IPO proceeds, which is no pocket change.
Quick Tip: Look into a companys financials to determine why they chose to do a direct listing process instead of an IPO. You will also want to look at how they plan to use the capital they raised. Here, you may find red flags like high debt they hope to pay off with DPO funds.
Does a direct listing raise money?
Unlike IPOs, direct listings dont always raise money by going public. However, the rules have changed over the years and some companies can now opt for whats called a direct listing with a capital raise.
Can you buy direct listing stock?
Once a company goes public through a direct listing, that stock is available to the general public on the stock market. These debuts happen fast, so you want to be ready. Use Public features like Instant Transfers to fund your brokerage account and make sure you dont miss potential opportunities.
Why do so few companies do direct listings?
Companies werent allowed to actually raise money through direct listings until 2020. Now that regulators have given companies the green light to raise capital in a DPO, the process is increasing in popularity.
According to Jay Ritter, finance professor and IPO expert, More and more companies will use direct listings to avoid selling underpriced shares in a traditional IPO or to avoid the dilution due to sponsor shares that come with a SPAC merger.
What is the benefit of a direct listing?
Direct listings are cheaper and faster options for going public. Without underwriting fees and the IPO roadshow that accompanies traditional IPOs, businesses can take advantage of positive market conditions more quickly.
Theres also no lockup period, which means existing shareholders (like employees and institutional investors) can maintain liquidity and motivate price action.How does a company prepare for a direct listing?
Companies opting for a DPO still work with investment bankers, though they serve as financial advisors rather than underwriters. Market makers price the stock by coordinating with these financial advisors. Ultimately, the market bases direct listing debut stock prices on buy and sell orders, financial advisor input, and reference prices.