Firms including Spotify, Slack and most recently Coinbase have eschewed the traditional IPO in favour of direct listings, but what is the difference between the two?
Crypto trading platform is scheduled to go public on the Nasdaq on Wednesday, although rather than the more conventional initial public offering (IPO), the firm is instead planning to list through a different method known as a direct listing.
Coinbase is not the first firm to use a direct listing to go public, with online video game platform () making its debut on the New York Stock Exchange in March using the same method.
Other well-known brands such as music streaming platform (), workplace chat platform () and data analytics group Palantir Technologies Inc (NYSE:PLTR) have also gone public using the method.
What is a direct listing?
Unlike a traditional IPO, when a company issues new shares and raises additional funds at its debut, in a direct listing the firm floating simply opens its existing shares for public trading.
A direct listing also does not involve underwriters, along with the fees they incur, or an IPO price for the shares that is designated by the underwriting bank to attract interest from potential investors.
Instead, in a direct listing, the stock exchange will designate the shares with a “reference price”, usually based on the value the stock traded for on the private market, as a benchmark for potential buyers.
This usually means shares in a direct listing do not see the “pop” associated with IPO listings, however, this doesn’t mean the shares cannot perform strongly on their first day of trading.
Why do companies opt for direct listings?
Listing on the stock exchange is often a costly process, however, a direct listing will allow a company to avoid the costs incurred during an IPO underwriting process, although the lack of an intermediary does remove the guarantee that there will be buyers for the shares.
A direct listing also removes the issue of share dilution, as no new shares are being created, as well as lockup periods, predetermined amounts of time following an IPO where large shareholders such as company executives and institutions, are restricted from selling their shares.
For firms with existing investor interest or a strong existing brand, such as Coinbase and Spotify, the need to drum up investor support through a roadshow is also likely to be less of an issue, therefore removing the need to incur fees through the IPO process by hiring underwriters.