A company can raise capital by listing shares on the public exchange market through two methods: Initial Public Offering (IPO) and Direct Listing. Whilst an initial public offering (IPO), where new shares are created, underwritten and sold to the public, is more predominantly well known, a direct listing is less well known. A direct listing, also known as Direct Placement or Direct Public Offerings, is where no new shares are created and only existing shares are sold to the public. Any investors, shareholders, or employees holding shares of a company can directly sell their shares to the public.
Generally, in the past, direct listings were only used by small companies who could not afford the services of underwriters for an IPO, and normally on small exchange markets. In the last few years, direct listings have gained momentum as an alternative to an IPO, with even large multinational companies undertaking a direct listing over an IPO.
Why choose a direct listing?
A company can choose a direct listing if they do not want to dilute existing shares. A direct offering avoids the issuance of new shares, and therefore prevents dilution to the company and its existing shareholders.
Unlike an IPO where there is usually a 180-day lockup period where shareholders cannot sell their shares during this period. A direct listing can avoid lockup periods as shareholders can sell their shares on day one of the direct listing, and therefore improving liquidity to existing shareholders.
A direct listing is also considered to be a cheaper alternative to an IPO as there are no intermediaries involved, such as an investment bank, to assist with the direct listing process, as a result a company will not have to pay any intermediary fees.
Drawbacks of a direct listing
Unlike an IPO there will be no intermediary to assist with selling the shares and therefore there may be less chance of success of ensuring the shares sell.
Moreover, in a direct listing there are no guarantees that there will be enough shares to meet demand which may result in the stock to become volatile. The pricing of shares in a direct listing is reliant on the market of supply and demand. Rather than establishing a fixed price range as in an IPO, a direct listing is similar to an auction where the market determines the share price and thus the share price can be unpredictable and volatile.
A direct listing may not raise any capital at all in comparison to an IPO. Shareholders are selling their existing shares to the public so the company may not actually be raising any capital at all, unlike an IPO where a company will sell new shares to the public. Therefore, raising capital would not be the main objective of companies going public through a direct listing.
Whether a company chooses a direct listing or IPO when going public depends on the objectives of the company and what the company would like to achieve from going public.
IPO Advice
Monarch Solicitors specialist IPO solicitors provide a tailor-made approach to your needs and can assist with an IPO. Please get in touch with us by either calling 0330 127 8888 or emailing [email protected] for an initial consultation.
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