A private company can go public through direct listings, a traditional IPO, or acquisitions through blank check companies. A direct listing is also called a DPO (direct public offering). A DPO involves private companies going public by selling their existing shares instead of creating new ones. Is a direct listing good or bad for stocks? How does direct listing work?
DPOs are specifically designed to let startup companies access the public capital markets with lower costs and complexities than traditional IPOs. Shares of Spotify, Slack, and Palantir Technologies started trading through direct listings.
How direct listings work
A direct listing is a way that private companies go public without going through the IPO process. In a direct listing, a company raises funds by offering its shares directly to the public. An issuing company using a direct listing doesn’t work with intermediaries — underwriters, broker-dealers, and investment banks — that are usual in traditional IPOs. As a result, the cost of capital of a DPO is significantly reduced.
In a direct listing, underwriters don’t set an IPO price and don’t sell the shares to a select group of investors. Instead, the opening price is determined by market forces like demand and supply. When the share starts trading on the public markets, any buyer can submit a price at which they are willing to purchase the shares.
In a direct listing, no fresh shares are created to avoid dilution and only existing outstanding shares are offered. The existing shares held by employees and investors are made available for the public to buy and don’t require a lock-up period. Also, an issuing company isn’t required to go through a formal book-building roadshow.
In a traditional IPO, fresh shares are created, underwritten, and sold to the general public. The underwriters facilitate the IPO process and charge fees for their work.
Companies that went the direct listing route
The two notable and large companies that went public through DPOs are Slack and Spotify. Spotify went public in 2018, while Slack went public in 2019. Spotify stock started trading at $165.90 per share, which gave it a $29.5 billion valuation based on the 178.1 million outstanding ordinary shares. The exchange set Spotify’s reference price at $132 per share.
Slack stock started trading at $38.50 per share, which gave it a $19.5 billion valuation. The exchange set Slack’s reference price at $26 per share. In 2020, Palantir Technologies and Asana went public through direct listings.
Roblox recalibrates. Raises tons of new private cash and will go public via direct listing.— Dan Primack (@danprimack) January 6, 2021
Roblox, an online gaming company for kids, plans to go public soon through a direct listing. Late in 2020, the gaming company filed to go public, but postponed its debut after shares of Airbnb and DoorDash popped out of the gate. On Jan. 6, Roblox announced that it raised $520 million in a private financing round, which gives it a valuation of $29.5 billion.
Direct listings raise capital
In a direct listing, the company going public can raise capital in the process. Last year, the SEC allowed direct listings to raise cash on the NYSE.