IPO vs. Direct Listing: Knowing The Difference
Initial public offerings (IPOs) and direct listings are both methods of releasing shares to the public and raising capital for a company by selling a stake in the business, but the two are actually not the same thing.
IPOs are more common than direct listings and involve the creation of new shares, which are then underwritten and sold to the public at a specific time.
On the other hand, direct listings, also known as “direct placements”, create no new shares, raise no funds and are usually not underwritten. They are usually done by companies that lack the resources to pay underwriters or do not want to dilute the stake of existing shareholders.
Traditionally, startups have taken the IPO route that over the years. IPOs have become synonymous with instant wealth for founders and early investors.
But a new generation of startups is looking to avoid the pomp and flair that comes with an IPO in favor of direct listings.
Listen to GHOGH with Jamarlin Martin | Episode 67: Jamarlin Martin
Jamarlin goes solo to discuss the NFL’s entertainment and “social justice” deal with Jay-Z. We look back at the Barclays gentrification issue in the documentary “A Genius Leaves The Hood: The Unauthorized Story of Jay-Z.”
Music-streaming service Spotify went the direct listing way in 2018, while workplace messaging platform Slack Technologies did the same in June. Airbnb is considering a direct listing as it weighs its options for going public.
These companies spend their initial years raising private funds and usually do not need any new funds when going public.
Unlike in the case of an IPO where bankers determine the price at which the share will be listed — usually at a discount to create a “pop on the debut day” — direct listing share prices are determined by the market.
Cutting out the bankers in the listing process makes direct listing unpopular with investment bankers.