Let’s get straight to the point.
A direct listing is when a company lists pre-existing shares for sale. An initial public offering (IPO), on the other hand, requires new shares to be created, underwritten, and then listed for sale.
A ‘private’ company is likely to have relatively few shareholders. It’s likely to count just friends, family, and professional investors as shareholders.
A ‘public’ company, on the other hand, has shares available to the general public.
At the end of the day, direct listings and IPOs are both ways that companies can raise capital — and both methods involve listing shares on a public exchange.
But it’s the process of making those shares available that differentiates the two.
What’s a direct listing?
A direct listing process involves making shares available to the public. The ‘direct’ bit comes from not having anyone else involved (underwriters, broker-dealers, or investment banks). This generally makes the process cheaper, which in turn might make a direct listing more attractive to a smaller company.
If a company already has an established, loyal client base, they might choose a direct listing over an IPO simply because they don’t need all that extra marketing and security.
Both Slack and Spotify went public via direct listings in recent times.
A company might decide on a direct listing over an IPO for any number of reasons, including:
- Avoiding the costs associated with hiring underwriters.
- Avoiding lockup agreements.
- Avoiding ‘diluting’ existing shares with the creation of new ones.
What’s an IPO?
The acronym IPO stands for initial public offering. This would occur when a company goes from private to public. To do so, the company creates new shares and offers them for sale to the public.
A company would generally consider the IPO process when it believes it’s mature enough for stock market regulations and is able to deal with responsibilities to public shareholders. Having said that, the company is likely also looking to raise money through the issuance of its stock.
In an IPO, underwriters (chosen by the company) work alongside the company to decide on the initial price of the shares (based on perceived interest), help navigate rules and regulations, and eventually help sell the shares through their networks.
Before arriving at the selling stage, the company and their underwriters will do as much as they can to create interest in the soon-to-be-available stocks.
What are the key differences?
An IPO is a pretty lengthy process which requires intermediaries (including, but not limited to underwriters, investment bankers, or broker dealers).
The direct listing process involves the company selling shares directly to the public without getting help from intermediaries underwriters.
IPOs usually also involve a lockup period, a period in which current employees and investors aren’t allowed to sell their shares. Direct listings don’t have one.