Why Direct Listing Is a Good Alternative for Companies
By Mohit Oberoi, CFAJan. 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.
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.
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.
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.
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.
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.
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.
