direct listing companies
Source: istock

Why Direct Listing Is a Good Alternative for Companies

By

Jan. 18 2021, Published 8:15 a.m. ET

Historically, companies wanting to go public had to look at the traditional IPO route, which involves an underwriter. However, over the last year, SPACs (special purpose acquisition companies) and direct listing have emerged as good alternatives to traditional IPOs. Which companies have gone public through a direct listing? Some companies are considering a direct listing.

Article continues below advertisement

In 2020, the NYSE changed its direct listing regulations, which some investors opposed. In a nutshell, if a company opts for a direct listing, investment banks get devoid of the underwriting fees that they earn from traditional IPOs.

spotify direct listing
Source: Koyfin
Article continues below advertisement

Companies that went public through a direct listing

The companies that have gone public through a direct listing are:

  • Spotify
  • Slack
  • Palantir
  • Asana

Spotify went public through a direct listing in 2018. Slack, which will be acquired by Salesforce, went public through a direct listing in 2019. While Spotify stock has delivered good returns for investors, Slack was a laggard and only rose to its listing day price after Salesforce announced its acquisition.

Article continues below advertisement

Data analytics company Palantir and workplace management software company Asana went public through direct listing in 2020. Both of the stocks have performed well. Palantir has almost tripled from its listing price.

Article continues below advertisement

Companies considering a direct listing in 2021

In February, Roblox will go public through a direct listing. GitLab is also expected to opt for a direct listing. While GitLab is widely expected to go for a direct listing, the official date hasn't been confirmed. 

Pros and cons of direct listing

From the perspective of companies that opt for a direct listing, the biggest pros are the ease, lower costs, and the less time involved compared to traditional IPOs. Also, there isn't a lockup period for existing investors. Most importantly, and the basic reason Roblox opted for a direct listing, is the efficient price discovery in a direct listing. In a traditional IPO, the company and underwriters price the share.

Article continues below advertisement

Direct listing has its share of cons as well. First, it isn't guaranteed that the listing will sail through because there isn't an underwriter as a fallback option like in a traditional IPO. Second, since only the existing investors can sell their shares in a direct listing, it isn't a good option for companies that are looking to raise cash by going public.

Article continues below advertisement

Are direct listings good for investors or companies?

From an investor's perspective, in a direct listing, there wouldn't be a pre-placement of shares, unlike a traditional IPO. There isn't a reference price and an investor can place an order at the price they wish. As a result, there's more market-based pricing than a traditional IPO. Investors also miss out on the strong listing day gains in a direct listing that companies like Snowflake, Lemonade, DoorDash, Poshmark, and Airbnb delivered over the last year.

However, since the company doesn't end up underpricing its shares in a direct listing, whose risk is for real in a traditional IPO, the existing shareholders don’t fear selling their shares at a lower price than what the market believes.

How direct listing works

Direct listing is a simple process and the shares would start trading on listing day. You can place the order to buy the number of shares you want through your broker. The trading would be similar to any other publicly-traded company and you can place both a market order and a limit order.

Advertisement

More From Market Realist

    • CONNECT with Market Realist
    • Link to Facebook
    • Link to Twitter
    • Link to Instagram
    • Link to Email Subscribe
    Market Realist Logo
    Do Not Sell My Personal Information

    © Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.