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Direct listing vs IPO What's the difference


Ever considered taking your company public? The decision can be daunting with multiple pathways available. Among the options, direct listing and IPO often emerge as front runners. 

Here, the fundamental differences between the two are clarified, assisting you in determining which might be the best fit for your business journey.


IPO explained

An IPO, short for initial public offering, stands as a conventional avenue for companies seeking to gather equity capital from a wide range of investors. 

During an IPO, a company that was previously private opens its doors, allowing investors the opportunity to buy its shares. 

The intricate process of an IPO involves a lead investment bank taking charge. This bank, in collaboration with other banks and broker-dealers, plays a pivotal role in ensuring the stock of the newly public company reaches the market effectively.

First, the underwriter undertakes a detailed valuation of the company. This is vital to set a justifiable share price. 

Following this assessment, the underwriter buys these fresh shares straight from the company and then proceeds to market them to external investors. As a result of the IPO process, a transformative change occurs. 

The private company underwent a metamorphosis, emerging as a publicly traded entity. 

Once the IPO is complete, the company's shares become available for anyone to buy on the respective exchange where they are listed. This accessibility broadens the investor base and amplifies the company's reach in the financial market.


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Direct listing explained

A direct listing, often termed a direct placement, presents a unique way for companies to make their shares available on an exchange.

Unlike traditional methods, this approach bypasses the need for intermediaries such as investment banks. In this method, company insiders directly sell their shares to the public. 

Additionally, the company has the choice to raise funds by selling its stock. It's worth noting that only since 2020 did the Securities & Exchange Commission (SEC) permit companies to gather capital through direct listings.

Direct listings aren't new, but their appeal has surged in recent years, especially among notable names in the business world. 

To illustrate, Spotify made history as the first company to use a direct listing on the New York Exchange, a move they made in 2018. It shows the growing acceptance and potential advantages of direct placements.

Direct listings have responsibilities to maintain transparency. They are required to submit a prospectus, a document that sheds light on the financial and legal aspects of the company. 

This also includes potential business risks and other vital data, ensuring potential investors have a comprehensive understanding of the company's position and future prospects.


Direct listing vs IPO: Key differences

Taking a company public is a monumental step in its growth journey. It signifies a blend of accomplishment and the onset of new opportunities and challenges.

At this pivotal moment, companies often grapple with a crucial decision: opting for the traditional initial public offering (IPO) or considering the modern approach of direct listing. 

Each method has its distinct attributes, pros, and cons. Below, I'll shed light on the primary contrasts between the two.

Share creation and intermediaries

During the IPO process, companies create new shares. Investment bankers play a pivotal role by underwriting these shares, ensuring their market placement and purchase. 

On the flip side, when companies opt for a direct listing, they sell their existing stocks without needing intermediaries.


In an IPO, there's a tight-knit collaboration between the company and underwriters. They jointly ensure that regulatory requirements are met, suitable investors are identified, institutional investments are garnered, and the stock price is appropriately set. 

All these steps aim for a successful and positive listing response when you choose an IPO.

In contrast, with direct listings, the middlemen or intermediaries are absent. 

Here, the existing shareholders, which could be promoters, investors, or employees, sell their shares directly to the public.

Shareholder protection

IPOs offer a protective umbrella to shareholders. They aim to draw in long-term investors, which brings stability.

During the listing, large shareholders further insulate against drastic price volatility. Direct listings, however, come with certain vulnerabilities. They lack underwriter support, share sale assurances, and promotions. This can leave investors more exposed to potential risks.

Cost factor

When companies decide to go public, financial considerations play a significant role. In IPOs, underwriters are instrumental but come at a price. Their fees usually range between 3% and 7% of the share price. 

Direct listings, however, sidestep this cost. This saving ultimately benefits those who buy the shares.

Lockup period

The IPO process introduces a lockup period, a span during which key investors like owners and venture capitalists are barred from selling their shares in the open market. 

This strategy prevents a sudden flood of shares right after listing, ensuring market stability. In a Direct Public Offering (DPO), no such restrictions exist. 

After the initial sale by existing shareholders, both institutional and retail investors can freely trade the shares.


Direct listing and IPO: Evaluating the better investment avenue

When considering the path of taking a company public, the choices often boil down to two prominent options: Initial public offering (IPO) and direct listing. Both avenues have their unique sets of advantages and limitations. 

The decision on which to choose largely depends on the company's specific needs, objectives, and current circumstances.

IPO, short for initial public offering, is a time-tested method that has been the choice of countless companies over the years. 

The core advantage of an IPO lies in its ability to raise capital. Companies issue new shares to the public, and the proceeds from this sale can be used to fund growth, repay debts, or for other corporate purposes. 

The process involves underwriters, usually investment banks that facilitate the IPO by providing essential services including risk management, pricing the shares, and ensuring their sale to the public. 

However, this comes at a cost, as underwriters charge a fee, typically a percentage of the total funds raised. Moreover, IPOs often come with a lockup period, which restricts certain shareholders from selling their shares for a specified duration post-listing. 

Direct Listing, on the other hand, is a relatively newer method and has gained traction in recent years. In this approach, no new shares are issued, and the company doesn't raise fresh capital. 

Instead, existing shareholders get the opportunity to sell their shares directly to the public. Since there are no underwriters involved, the costs associated with a direct listing are generally lower than those of an IPO. 

However, the absence of underwriters also means there's no safety net in terms of setting the initial share price or guaranteeing a minimum amount of funds raised. 

One notable feature of direct listings is the absence of the lockup period, allowing shareholders to sell their shares immediately.

Both direct listing and IPO offer distinct advantages, and it's not accurate to universally declare one as superior to the other. Their suitability hinges on a company's goals and situation.

If raising capital is a primary objective, an IPO might be more apt. However, if a company wishes to provide liquidity to its existing shareholders without the involvement of intermediaries and associated costs, direct listing could be a preferred choice.

As always, companies should engage in thorough discussions with financial advisors, taking into account their unique position and aspirations, before deciding on their path to the public market.


The bottom line

The journey of taking a company public unfolds through varied pathways, with direct listing and IPO being two primary avenues. 

On one hand, an IPO involves a complex yet tried-and-true process of collaborating with investment banks, establishing an optimal share price, and broadening a company's investor base. 

Conversely, a direct listing offers a simpler, more direct method, allowing companies to list shares without the involvement of intermediaries, reflecting a modern twist in public offerings.

Both these processes have their inherent merits and challenges. While IPOs provide additional safeguards for shareholders and involve structured processes, direct listings afford more immediate flexibility and can result in cost savings. 

The choice hinges upon a company's specific needs, market dynamics, and its strategic objectives.


When considering initial public offering (IPO) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.

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