Spotify made headlines in 2018 when it elected to list directly on the New York Stock Exchange. Since then, there has been an influx in the number of companies electing to go public via direct listings, including Slack, ZipRecruiter, Squarespace, Asana, Palantir Technologies, Roblox, and Coinbase.
It was predicted that the number would increase in 2021 after the SEC gave companies opting to list directly the tick of approval to raise capital while listing. But that isn’t quite the case.
So, what are direct listings? And what’s driving the surge in popularity?
Direct listings allow companies to go public without engaging in the traditional initial public offering process. Instead, companies are able to trade publicly by selling existing shares directly into the market simply by filing a registration statement with the SEC (hence the name: direct listing).
The Economist refers to direct listings as “the cheap and easy way of going public”. They are being touted as an antidote to some of the issues with IPOs, in particular, the opening jump in prices that are increasingly occurring – like that of Airbnb, which jumped 112% on its opening day – as well as the lock-up periods which freeze liquidity for up to 180 days.
Other advantages of direct listings are:
- Significant savings on fees for banks, underwriters, and marketing.
- Greater control over stock pricing.
- Equal access to buyers and sellers on the market.
- No need to go through the FINRA review process, which can take up to 180 days.
However, direct listings aren’t the perfect route to public trading for every company.
Direct listings are best suited to mature, well-known companies that have received significant investment while they’ve been privately owned. While companies are no longer prohibited from raising capital via direct listings, we haven’t seen companies take advantage of the SEC’s relaxation of the regulations around capital raising.
To date, direct listings are really only being taken advantage of by cash-flush unicorns that are skeptical of the value of IPOS – and the accompanying underwriting fees. While this may change in the future, startups today should usually leave direct listings to mature, well-known companies that don’t need the Wall Street IPO hype to generate sales.
And remember, while direct listings are trending, IPOs aren’t likely to go anywhere. They’re still a preferred mechanism for any company who sees the benefit in the Wall Street hype, including the likes of Bumble and Doordash.
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