Direct Listings: An Alternative to IPOs

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Direct Listings: An Alternative to IPOs

Initial public offerings (IPOs) have been a traditional path for companies seeking to raise capital. However, there are other alternative methods available, including direct public offerings, also called direct listings. For companies, it can be a smoother path to capital. And for investors, it can be a more straightforward path to owning shares in a company.

“Typically, smaller companies use direct listings to sell shares to raise funds,” explains Richard Cayne of Meyer International. “But with Spotify’s successful direct public offering in 2018, some companies, especially those in the tech sector are seriously considering them now.”

Direct listings are simpler than IPOs

The fundamental difference between direct listings and traditional IPOs is that no new shares are being created. The company, current investors, and stock-holding employees would sell their existing shares. This simplifies the listing process. Since the shares already exist, there is less regulatory oversight. So, underwriters are not needed to help value, guarantee, or seek investors. This cuts down on preparation time, and the company saves money on legal and financial advisor fees.

Furthermore, the company’s share value won’t be diluted by the issuance of new shares. The company also has greater control over the listing itself, setting terms such as minimum investment and settlement dates. Also, companies don’t have to “road show”– presenting and disclosing their business operations and practices to potential investors. Some companies see this as exposing themselves to too much scrutiny, which can deter investments.

Are direct listings a safe investment alternative?

Without the traditional confines of an IPO, direct listings can be more volatile as investors can buy and sell shares without safeguards like lock-up periods (time frames during which investors cannot sell shares). But direct listings allow individual and non-institutional investors the opportunity to purchase shares in a company.

However, since there is less oversight and less disclosure, investors must be more vigilant when it comes to direct listings. Things have come a long way since Ben & Jerry’s famously sold shares in their ice cream company directly to their Vermont neighbours for $10.50 a share though ads in local newspapers. With billion-dollar valuations such as AirBnB possibly going public through direct listings, everyone is excited about getting in as soon as the opening bell rings. But you should do some due diligence on your own at the very least. Or confer with a trusted advisor before you invest in a direct listing.

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