Shobhit Seth is a freelance writer & an expert on commodities, stocks, alternative sầu investments, cryptocurrency, as well as market and company news. In addition to being a derivatives trader and consultant, Shobhit has over 17 years of experience as a hàng hóa manager và is the owner of FuturesOptionsETC.com. He received his master's degree in financial management from the Netherlands and his Bachelor of Technology degree from India.
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IPO vs. Direct Listing: An Overview
Initial public offerings and direct listings are two methods for a company to raise capital by listing shares on a public exchange. While many companies choose to vày an initial public offering (IPO), in which new shares are created, underwritten, và sold lớn the public, some companies choose a direct listing, in which no new shares are created and only existing, outstanding shares are sold with no underwriters involved.
A company looking lớn raise interest-free capital from the public by listing its shares has two options—an IPO or a direct listing.With IPOs, the company uses the services of intermediaries called underwriters, who facilitate the IPO process & charge a commission for their work.Companies that can"t afford underwriting, don"t want share dilution, or are avoiding lockup periods often choose the direct listing process, a less-expensive option than an IPO. Without an intermediary, however, there is no safety net ensuring the shares sell.Direct listings are also known as Direct Placement or Direct Public Offerings. In this process, the company sells shares directly to the public without getting help from intermediaries.
Initial Public Offering
In an IPO, new shares of the company are created & are underwritten by an intermediary. The underwriter worksclosely with the company throughout the IPO process, including deciding the initialofferprice of theshares, helping withregulatory requirements, buying the available shares from the company, & then selling them lớn investors via their distributionnetworks.
Their network comprises investment banks,broker-dealers, mutual funds, & insurance companies. Prior lớn the IPO, the company & its underwriter partake in what"s known as a "roadshow," in which the top executives present to lớn institutional investors in order khổng lồ drum up interest in purchasing the soon-to-be public stochồng.
Gauging the interest received from network participants helps the underwriters phối a realistic IPO price for the stock. Underwriters may also provide a guarantee of sale for a specified number of stocks at the initial price and may also purchase anything in excess.
The underwriter has two options for distributing shares to initial investors—book-building, in which shares can be awarded to investors of their choosing, or auctions, in which investors who are willing to bid above the offer price receive sầu the shares. While auctions are rare, the most notable example is Google"s IPO in 2004.
All of these services come at a cost. Underwriters charge a fee per tóm tắt, which may range anywhere from 3% to lớn 7%. This means that a notable portion of the capital raised through the IPO goes to compensate intermediaries, sometimes totaling in the hundreds of millions per IPO.
While the safety of an underwritten public listing may be the best choice for some companies, others see more benefits with a direct listing.
Direct Listing Process
Companies that want to vày apublic listing may not have sầu the resources to lớn pay underwriters, may not want lớn dilute existing shares by creating new ones, or may want to avoid lockup agreements. Companies with these concerns often choose khổng lồ proceed by using the direct listing process, rather than an IPO.
The direct listing process (DLP) is also known as direct placement or a direct public offering (DPO).
With a direct listing process (DLP), the business sells shares directly to the public without the help of any intermediaries. It does not involve sầu any underwriters or other intermediaries, there are no new shares issued and there is no lockup period.
The existing investors, promoters, and any employees already holding shares of the company can directly sell their shares khổng lồ the public.
However, the zero- to lớn low-costadvantage also comes with certain risks for the company, which also trickle down khổng lồ investors. There is no tư vấn or guarantee for the nội dung sale, no promotions, no safe long-term investors, no possibility of options like greenshoe, & no defense by large shareholders against any volatility in the chia sẻ price during và after the nội dung listing.
The greenshoe option is a provision in an underwriting agreement that grants the underwriter the right lớn sell investors more shares than originally planned by the issuer if the demvà proves particularly strong.
Both those companies that elect khổng lồ follow the direct listing process and those companies that undergo an IPO must publicly file a registration statement on Form S-1 (or another applicable registration form) with the Securities & Exchange Commission (SEC) at least 15 days in advance of the launch.
Upon listing of the company’s stoông xã (whether it"s through a direct listing or an IPO), companies are subject khổng lồ the reporting & governance requirements applicable lớn all publicly traded companies. The SEC requires all publicly traded companies khổng lồ prepare & issue two disclosure-related annual reports—one that is sent to the SEC & one that is sent to lớn the company"s shareholders. These reports are referred khổng lồ as 10-Ks.
Thành Phố New York Stoông xã Exchange (NYSE) and Nasdaq Explore Direct Listings
On November 26, 2019, the NYSE laid the groundwork with an SEC filing to allow listed companies lớn raise capital và go public through a direct listing. The NYSE has allowed them in the past with companies including Spotify và Slack but was hoping lớn expvà the practice, pending the results of the public bình luận period on the proposal.
Under the NYSE"s proposal, a direct listing would let both the company & company insiders sell stoông chồng at listing, provided that the company sells at least $250 million worth of shares. There are no new lockup requirements, in that insiders can sell shares of the company as soon as it lists rather than wait up to lớn 180 days to lớn do so.
On December 6, 2019, the SEC rejected the NYSE"s proposal, although the NYSE says it will continue trying to lớn appeal the decision. The Nasdaq is also reportedly working with the SEC lớn offer direct listings as well.
On December 22, 20đôi mươi, the U.S. Securities và Exchange Commission announced that it will allow companies to lớn raise capital through direct listings, paving the way for circumvention of the traditional initial public offering (IPO) process. In a direct listing, a company floats its shares on an exchange without hiring investment banks lớn underwrite the transaction as an initial public offering.
In addition lớn saving on fees, companies that follow the direct listing process may avoid the usual IPO restrictions, including lockup periods that prsự kiện insiders from selling their shares for a defined period of time.
IPO vs. Direct Listing Example
Spotify Technology S.A. (SPOT) went public on April 3, 2018, using a direct listing, making it one of the more prominent companies to vị so.
According to a case study on Spotify"s direct listing done by Harvard Law School Forum on Corporate Governance and Financial Regulation, Spotify chose a direct listing over an IPO because it offered greater liquidity, allowed existing shareholders lớn sell shares directly to lớn the public, và allowed transparency with market-driven price discovery, among mỏi other reasons.
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