Which way for companies in 2020? IPO Vs. Direct Listing

Most companies that have gone public over the past few years have
used one common channel to do: Initial Public Offering
(IPO). However, firms have been considering an alternative to the IPO way of
listing known as a Direct
Listing.

Now, while the former is a household name to many an investor, the
latter is fast gaining popularity, thus the need to explain the difference
between the two.

At its simplest, an Initial Public Offering involves the sale of new
securities to underwriters and their clientele. On the other hand, a direct
listing entails a “secondary” sale of shares to grant existing shareholders
such as the founders, vested employees, and “in-house” investors a liquidity
option.

Initial Public Offering

The IPO process entails the following:

• Filing an S-1
  with the Securities and Exchange Commission
• Setting a goal of
  how much you wish to raise with your IPO
• Establishing a price for the shares to be
  issued
• Sell your shares to institutional investors
• Commence trading on a public platform such as
  the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE).

Investors are usually keen on a company’s first-day opening and closing
prices. It is generally good for a company’s shares to start trading above the
IPO price but the price shouldn’t be overly high since newly-listed companies ought
to avoid leaving money on the table.

Direct Listing

Just as the name suggests, this method of listing is ‘direct’ in
the sense that it bypasses numerous steps involved in a typical traditional
listing.

Companies that go for a direct listing are exempted from setting
an IPO price range, marketing to investors through roadshows, establishing a per-share sale price, among other things.

A direct listing is more suitable for companies that have an
established brand since the market already reasonably knows and understands the
firm in general. But relatively new companies may want to go for a traditional
IPO.

Jay Heller of Nasdaq
says that a firm that fits a direct list should be well-known, have a seasoned
team of managers, doesn’t have an immediate need for capital, and is ready to
furnish stakeholders with all the relevant metrics and financial projections before
the listing.

Heller, however, notes that while direct listings come with several
perks, including shorter listing requirements, some companies end up experiencing
liquidity and potential volatility issues.