Role of an Exchange: Demystifying Direct Listings
Investors and companies are increasingly learning about different paths to going public. Whether it is a traditional initial public offering (IPO), special purpose acquisition company (SPAC) or direct listing, each route offers unique benefits and risks for companies and investors to consider. Previously, we explored the rising popularity of SPACs and the opportunities they provide. In this article, we aim to demystify direct listings. Before comparing the benefits and risks to companies and investors, let us delve into what a direct listing is and how it differs from a traditional IPO.
What Is a Direct Listing?
Direct listings are an alternative means for a private company to become a publicly-traded company. Traditionally, companies that have been ready to enter the public market have predominately chosen IPOs to go public because it would provide the company with new capital by offering new shares in the public market.
However, new capital may not be essential for companies going public at later stages of their organizational life cycle. Unlike a company going public through an IPO, a company utilizing a direct listing is not offering new shares in the public market. Instead, the company provides liquidity to existing shareholders, including investors and employees, by permitting them to sell their shares in the public market by utilizing a direct listing. Companies choosing a direct listing typically have had no immediate need for additional capital, have a large and diverse shareholder base and are a well-known brand with an easy-to-understand business model. Recent examples of direct listings include Coinbase (COIN) and Spotify (SPOT).
The Benefits and Risks of Direct Listings
Both Nasdaq and the New York Stock Exchange offer companies the ability to raise capital in connection with a direct listing. This allows companies who need to raise capital immediately to benefit from the price discovery process of a direct listing while combining it with a capital-raising event.
That said, it contains unique risks around the price range within the prospectus. For example, if the opening price on its first trading day is outside of the price range on the prospectus, the company must amend the prospectus and open on another day. This is a current impediment that could cost companies time and money. Nasdaq has recently proposed one solution to this issue that would increase the price range that a company can open at.
Key Takeaways
Along with SPACs and traditional IPOs, direct listings provide companies with a path to going public on a U.S. exchange. Direct listings, like IPOs or SPACs, are subject to all of the applicable regulations of the Securities Act of 1933, the Exchange Act of 1934, and listing rules of the company’s exchange. However, each path to going public contains unique benefits and risks that investors and companies should consider carefully prior to going public.
Information is provided for educational purposes only. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry, strategy or security mentioned herein and nothing contained herein should be construed as legal or . Nasdaq does not recommend or endorse any securities offering; you are urged to read the company’s SEC filings, undertake your own due diligence and carefully evaluate any companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.