Direct Listing – Concept, Benefits, Downsides, Comparison & more

This article is to make out why direct listing matters, what are its pros and cons. In the end, we will discuss the things that investors should consider.

What private companies do when they want to fund their capital needs?  Debt isn’t that appealing alternative, for sure. This is when IPO kicks in mind.

Whenever such situations arrive, CEO and further financial managers never fail to recall the plan of going public via IPO.

We can’t deny that it is the easiest way for a company to pile up required capital for their businesses.

But this doesn’t bear out that you don’t have any other great option available.

Apart from IPO, there is another critical component “Direct Listing” that most companies prefer about which we will discuss right over here.

So without further ado, let’s get into the topic.

What are Direct Listings?

A direct listing is an excellent alternative to IPO (Initial Public Offering). If you know what an initial public offering is, knowing about this would be easier for you.

Directly listing refers to a process through which privately-owned companies issue their shares to the general public. It is similar to an Initial Public Offering.

But unlike IPO, the direct listing has its unique specs, and companies choose this alternative to fulfil their varying business goals.

For instance- Companies planning to go public via Direct Listing sell their existing shares instead of the new one, which happens in IPO. Also, this type of listing is comparatively faster than IPO.

Under IPO, the added cost and underwriters’ excessive involvement create the whole process quite lengthy and costly for the investors.

With minimal bureaucracy and lock-up, investors can trade directly in Direct listing. That makes a good reason why this is a growing popular alternative to Initial Public Offerings.

The company’s employees and existing investors also retain the right to sell out the shares to the public.

Often, companies can’t afford underwriters involvements, and the lock-up period often turns out to be a barrier for their business plan. That’s why they find this type of Listing a nice choice.

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Upsides & Downsides of a Direct Listing

The direct listing comes with its own advantages that also make a great reason why companies find it an attractive option. With directly listing, shareholders are exposed to higher liquidity.

This indicates that they can issue the shares to the open market freely as no restrictions are imposed.

Secondly, Direct listing costs less in comparison to IPO. Companies get rid of hefty fee in here, that is a problem with IPO.

Since Direct Listing is the direct way of selling the shares, no indirect charges can be found.

This was all about the benefits of a direct listing, but we can’t leave unnoticed the major downsides of it.

Compared to IPO, it is more likely to face a higher initial volatility issue as no investment bank works as an intermediary to balance the prices.

If due to any reason, the employee or existing investors refuse from selling the shares, no transaction will be processed.

Also, the share prices will be subjected to the market demand and supply.

Why do Companies select Direct Listing?

Unlike IPO, companies going public via direct listing may have unique goals. Usually, companies choose IPO for business funding.

Such companies may have some solid business expansion plan for which they aspire to raise more funds by allotting their shares to the general public.

On the other hand, the direct listing alternative isn’t necessarily used for such purposes. Companies may collect fund through this type of listing to fulfil their urgent capital needs.

For instance- they may go with direct listing to sustain liquidity for the existing shareholders.

In a nutshell, companies opting for this listing may not seek capital but to accomplish their further business task.

What does Direct Listings mean for Individual Investors?

A direct listing may create a great opportunity for investors. For instance, shares aren’t allocated to all investors in IPO as restrictions applied.

On the other hand, all investors have access to a company’s shares via a direct listing.

This implies that all you have to do is invest in direct listing shares. You may do this with the help of a broker or any trading platform, as it is simple as investing on any share in the stock market.

Companies also share some valuable information about their offering with the investors presented on the investors day before direct listing. If you are a beginner, make sure you consider this critical point.

It is possible that the company has a good reputation in the market and the absence of intermediaries portrays that the information shared is reliable.

Next, we will discuss the critical differences between both Public offering and Directly listing, so you get a clear insight into both.

Compare IPO vs Direct Listing

Here are the distinctions between IPO and direct listing that illustrate how they are different from each other-

Kind of shares offered

The company can issue both existing and new shares to the general public in the IPO process.

On the other hand, the shareholders can only issue and sell the company’s existing shares but not new ones.

Who can buy shares?

In IPO, this particular segment is subject to the demand of shares. The allotment criteria may also decide who can buy the shares.

However, retail or institutional investors may not get shares in IPO.

Whereas the company may initiate trading on stock exchange indirect listing as usual. Any investor can come to park their money in such companies.

Role of Investment Banks

An investment bank may act as an intermediary between investors and the company in IPOs. Even they are responsible wholly or partly if the prices of newly issued shares go up and down.

If we talk about Direct Listing, then they only act as financial advisor.

Underwriting

IPO underwriters, or investment banks, help sell shares. They may help to raise capital for the company by buying IPO shares.

On the other hand, no underwriter is available in the direct listing process. Shares are traded directly on the stock exchange.

Initial Share Price

An investment bank or company itself decides the initial share price in IPOs.

Companies entering the stock market may take reference from Investor demand to set the share prices.

Shareholder lock-up

Whether entering the stock market via IPO or Direct Listing, companies always ensure that no shareholders sell the shares before the lock-up period (typically last from 90 to 180 days).

Investor communication about the offer

In IPO, Investors are invited on a road-show whereas the opportunities are open to everyone in Direct Listing.

Direct Listing – Conclusion

In the end, we can find how the direct listing works. From top to bottom, we reviewed every point of this Listing. There’s no surprise that this specific segment is similar to Initial Public Offering.

Still, it is different, mainly because companies who choose direct listing may use the funding for different purposes.

Also, the process of entering the stock market via IPO is comparatively easier and faster than IPO, which is quite helpful for both companies and aspiring traders.

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