Traditionally, investment banks are at the heart of the initial public offering (IPO) process, producing research reports and marketing a company to drive up demand ahead of its listing. Banks also act as underwriters, meaning they assess the financial risk of a company and help market shares to interested institutional investors. But some tech companies forgo the standard IPO process in favor of a Direct Public Offering (DPO), also known as a direct listing.
What is a direct listing?
A direct listing is a process for a private company to become publicly traded by listing its existing shares on a stock exchange without using intermediaries like underwriters or investment banks. Unlike a traditional initial public offering (IPO) where new shares are issued to raise capital, a direct listing allows existing shareholders—including founders, employees, and investors—to sell their outstanding shares directly to the public up to the initial day of trading on a public exchange like the New York Stock Exchange (NYSE) or NASDAQ.
In a direct listing, the stock price is not predetermined by investment banks or underwriters. Instead, the stock’s initial price is determined by market demand on the first day of trading and can fluctuate significantly when trading begins. Companies that choose a direct listing usually have strong brand reputation and financials to attract investors.
Direct listings are often chosen by companies that do not need to raise additional capital but want to provide liquidity to their existing shareholders or achieve public visibility. By avoiding the issuance of new shares, these companies prevent ownership dilution, ensuring that existing shareholders retain their proportional stake.
Whether a company goes public through the direct listing process or a traditional IPO process, they will need to file an S-1 Registration Statement, which includes a prospectus and detailed disclosures about the company. Form S-1 is required by the Securities and Exchange Commission (SEC) before shares can be listed on a public exchange.
Direct listing vs IPO
Here’s a basic breakdown of direct listings compared to IPOs, and what companies and employees like about each option:
| Direct listing | Initial public offering (IPO) | |
| Purpose | Provide liquidity to existing shareholders. | Raise capital by issuing and selling new shares. |
| Share issuance | No new shares issued. Only existing shares are sold. | New shares are issued and sold to raise funds. |
| Pricing | Determined by market supply and demand on the first trading day. | Determined by underwriters based on investor demand and market conditions. |
| Underwriters | No underwriters involved. | Underwriters market the stock, determine pricing, and allocate shares. |
| Cost | Lower costs (usually 0.5%-1%). | Higher costs due to underwriting fees ( 4.1%-7%) and additional expenses. |
| Lock-up period | No lock-up period. | Typically includes a lock-up period between 90 to 180 days. |
| Volatility | Usually high share price volatility on the first trading day. | Usually less volatile, as underwriters stabilize prices. |
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