Direct Listings: An Alternative Path to the Public Markets
The IPO market has boomed this year, building momentum from 2020 as a wave of companies look to tap the public markets. But the manner in which companies are going public has expanded beyond traditional initial public offerings (IPO) to Special Purpose Acquisition Company (SPAC) listings and direct listings, such as Coinbase.
"As the last few years have gone by, we always have a handful of direct listings conversations going on, but probably more now than ever," Nelson Griggs, president of the Nasdaq Stock Exchange, said during an interview on CNBC.
Following Coinbase's "smooth" auction process, Griggs noted that "direct listings are here to stay, and we anticipate seeing more on Nasdaq."
To further understand the process of going public through a direct listing, we spoke with Jack Cassel, Head of New Listings and Capital Markets at Nasdaq.
How are direct listings different from IPOs?
A direct listing is a process in which a company can become publicly traded without an underwritten IPO and allows companies to list without concurrently raising capital.
In a traditional IPO, new shares of the company are created and underwritten by an intermediary. The company will list the securities on an exchange to raise capital and provide liquidity to existing shareholders. In a direct listing, however, the company’s existing shareholders have the opportunity to directly sell their shares on the open market, and no additional shares are offered to the public.
Companies typically have different objectives when pursuing a direct listing instead of a traditional IPO. Some companies may not have a near-term need for additional capital; others may not want to dilute the existing shareholders by creating and selling new shares; and some companies may want to avoid lockup agreements and provide immediate or near-term liquidity for their shareholders. In the end, the company will first need to make sure it is ready to be a public company and then weigh the benefits and risks of each process and decide on the path that will work best for their strategic objectives.
How does the auction process work in a direct listing?
The auction for a direct listing works similar to an IPO. The day before trading begins, Nasdaq will publicize a reference price. The reference price is calculated based on factors such as the company’s public financial information, previous private market valuations, and the value of the company’s public competitors. Nasdaq is required to determine the price to use for purposes of certain rules related to the opening auction and will work in concert with the company’s financial advisor to determine such reference price, the closest analog to an initial filing range in an IPO process.
On the first day of trading, an auction commences—first indicating the size of demand, and then at what price as supply and demand start to build. Buyers and sellers will adjust their orders for several hours as the market begins to focalize on the equilibrium price.
The financial advisors analyze this information leveraging Nasdaq’s Bookviewer technology. Bookviewer provides a real-time view of order data during the initial pricing of the direct listing. Once the lead financial advisor sees a balance in the order book, then they will instruct Nasdaq’s Execution Team to open the stock for trading.
How is Nasdaq innovating in the process by which a company could go public via direct listing?
Companies have used Nasdaq’s Private Market platform to facilitate trading of private secondary shares ahead of their direct listings. By leveraging Nasdaq Private Market, the secondary trading is centralized on one platform, which reduces the administrative burden of the company and streamlines the price discovery for the financial advisors.
Nasdaq also continues to work closely with the banking and legal communities, as well as the U.S. Securities and Exchange Commission (SEC), to provide companies an additional path to the public markets via a direct listing with a capital raise. Notably, in September 2020, Nasdaq submitted a rule filing to the SEC that would enable companies to raise capital through a direct listing. We believe our modified rule filing will give the company and its advisors more optionality.
Nasdaq has allowed direct listings for many years. While direct listings are not the right option for all companies, certain companies, most recently Coinbase—the largest direct listing to date—considered their options and determined that this method of accessing the public markets was the right step in their journey.
THE NASDAQ PRIVATE MARKET, LLC IS OPERATIONALLY INDEPENDENT AND DISTINCT FROM THE NASDAQ STOCK MARKET, LLC. TRANSACTIONS IN SECURITIES CONDUCTED THROUGH NPM SECURITIES, LLC AND SMTX, LLC ARE NOT LISTED OR TRADED ON THE NASDAQ STOCK MARKET LLC, NOR DO SUCH TRANSACTIONS AFFECT AN ISSUER’S ELIGIBILITY TO LIST ITS SECURITIES FOR TRADING ON THE NASDAQ STOCK MARKET, LLC.
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