IPO vs DPO: What Is the Difference?

When a company goes public via an IPO, the underwriters distribute shares among select brokerages who then impose restrictions on who is allowed to participate in the IPO. Unlike an IPO that issues pre-market IPO shares, a Direct Public Listing will simply start trading on the exchange upon market open, with privately-held shares from existing investors. A common alternative to selling stocks publicly via IPO is through the process of direct listing .

In the direct listing process, the company lists existing shares rather than issue new ones to raise new capital. This eliminates the need for a roadshow or underwriter, which saves the company time and money. The traditional initial public offering model has been disrupted by the emergence of direct listings, in which a company starts selling shares directly to the public. The investment bank helps the company set an initial offer price for its shares. The bank then purchases these shares from the company, which are then sold to retail and institutional investors via a network of distributors.

Q: What is a direct listing vs. IPO?

Alternatively, a direct listing should be the priority of companies that don’t want to raise capital but want to list on the exchange at a low cost. 2021 saw a record number of companies going public, driven by a late-stage bull market with soaring stock prices. In 2022 that pattern has been reversed, with IPOs, SPACs, and direct listings all spiraling downward. A FactSet report states that IPOs in Q1 of 2022 declined 87.6% year-over-year to 57 and fell by 82.5% year-over-year in Q2 to 35. A direct listing process is a good bet if a company wants to minimize its listing costs, avoid diluting existing shareholder wealth by creating new shares, or avoid lockup agreements. One is by book-building, where you invite institutional investors to provide bids for the number of shares, and the price one is willing to pay for the same.

All of the Direct listing vs ipo sold by the company itself must be sold in the opening auction, at one price and at one time. Selling shareholders may also sell in the opening auction if there is demand for additional shares at the opening auction price and may also sell at any time after the opening auction is completed. Recently, NASDAQ has petitioned the United States Securities and Exchange Commission tolift limitson raising capital through the direct public offering and the maximum price at which shares can be traded. It is also worth mentioning that SEC has given the New York Stock Exchange permission to list new shares alongside existing ones from companies seeking direct public offering.

In 2021, there were just seven direct listings in the U.S., according to Dealogic. IPOs in 2021 raised a total of $142.4 billion, according to Renaissance Capital, an IPO research firm. No new capital or “dilution” for existing shareholders (meaning the supply of shares available doesn’t increase when the stock goes public, which can reduce or “dilute” the shares’ value).

Pros & Cons of a Direct Listing vs. an IPO

An IPO sells stock in the company, typically with the intent to raise money for the company. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products.

From an investor’s perspective, the difference between an IPO and a direct listing may be minimal. The exact process is almost irrelevant to investors once the stock is trading publicly. With either method, investors can buy and sell the stock on the stock exchange, and that’s what investors finally care about, not whether it came to market through one method or another. An initial public offering refers to the process of offering shares of a private corporation to the public in a new stock issuance.

In a direct listing, in the absence of intermediaries, existing shareholders such as promoters, investors, and employees sell their shares to the public. The company then must determine how much it will list shares for on the exchange. These shares are then sold as a block to institutional investors before being opened up to trading on the public market. While this risk pertains to both IPOs and direct listings, there is no assurance that the newly public company’s shares will be priced “correctly” or sufficient numbers of shares are sold. Certain investment banks also take on the risk to sell all shares, which can compel them to lower the offering price to ensure all shares are sold, so they’re not left holding onto too many unsold shares.

How to participate in a DPO

You need to identify publicly listed companies similar to the private entity. So, the public company should ideally be a competitor of a similar size and grow at a comparable rate. An IPO, SPAC, or direct listing are all viable ways for a company to go public.

The abundance of liquidity allowed public shareholders to build larger positions much more quickly. The four direct listings have not experienced the liquidity-constrained price dynamics that similar IPOs have. A company that chooses a direct listing should be comfortable ceding control on liquidity and pricing to the marketplace.

First, you estimate the revenue growth of the private company by calculating the average growth rates of peers that are listed. Similarly, you need to estimate operating margins, working capital requirements, capital expenditures, and taxes to calculate free cash flow. Comparable company analysis is one of the easiest ways to value a private company.

On their first day of trading on the NYSE, Spotify shares opened at$165.90, up over 26% from the reference price of $132. Financial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. IPOs involve the use of an underwriter and a roadshow, which inform the price of the IPO, while direct listings eschew these to save of costs.

Special Purpose Acquisition Company (SPAC)

These investments are speculative, involve substantial risks , and are not FDIC or SIPC insured. Alternative Assets purchased on the Public platform are not held in an Open to the Public Investing brokerage account and are self-custodied by the purchaser. The issuers of these securities may be an affiliate of Public, and Public may earn fees when you purchase or sell Alternative Assets. For more information on risks and conflicts of interest, see these disclosures. Companies weren’t allowed to actually raise money through direct listings until 2020.

A SPAC is similar to a reverse merger, which was once a common way to go public. In a reverse merger, a private company would acquire an inactive but still listed company, called a shell, and merge into it. Reverse mergers flourished in the late 90s and early to mid-00s, but the SEC introduced strict rules to deal with dubious practices in the reverse merger market and they faded from popularity.

This helps to generate interest in share sales and enables the underwriter to set a reasonable initial offer price. The underwriter’s fee, often ranging between 3 per cent and 7 per cent per share, consumes a notable chunk of the capital raised. However, the underwriter will usually guarantee that a certain number of shares are sold at the initial offer price, providing a safety net for the company. The most popular way for a company to go public is via an Initial Public Offering , with the alternative option being a Direct Listing.

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As an IDFC FIRST Bank savings or salary account holder, you can open a Demat account free of cost and apply for any IPO. These companies have set an outstanding example, demonstrating that companies may collect significant cash even with the less common direct public offering option. Slack and Spotify are two well-known companies to use the direct public offering strategy. Slack is a proprietary communication application developed by the American firm Slack Technologies. On the other hand, Spotify is a media streaming service application from the Swedish company Spotify Technology SA.

• SPACs also benefit from greater predictability, since they are contingent on the flat amount raised from investors, rather than the shifting price of shares under a traditional IPO or direct listing.
• There are no sales, profit, asset or other traditional requirements or qualifications.
• IPO shares typically have a lockup period, meaning that they cannot be sold for a fixed time after the IPO.

Or they could bypass the middlemen, belly up to a booth at the local farmer’s market, and hawk their sweet corn, almonds, or peaches directly to the public. What’s best for the company and the investor, an IPO, SPAC, or direct listing? From an investor’s perspective – particularly long-term investors – the health and prospects of the underlying company are more important than the method used to go public. So, if the company raises $1 billion, it will pay between $35 million and $70 million as underwriting fees, which is quite significant.

IPO vs Direct Listing: What you need to know

Still, recently, companies have shown that DPO is also a good way of raising capital and enjoying benefits without paying much to underwriters and banks. This strategy is often used as an alternative to an initial public offering by companies with substantial brand value, goodwill, and goals other than raising capital. It means they will not have to issue new shares or pay any fees to raise funds, making it a more cost-effective way to go public than an IPO. Furthermore, it improves liquidity and volatility in the open market for existing shareholders .

It’s https://forex-world.net/ a good thing to see a company’s stock price close higher than the listing price on the first day of trading. “Direct listings have traditionally been made in the over-the-counter market, in which securities are traded through a broker-dealer network rather than on a listed exchange such as the New York Stock Exchange,” says Gilley. This method allowed companies to set their own terms, including the stock’s initial price and any limits on shares that could be purchased. A company may opt for a direct listing over a traditional IPO for a variety of reasons, but some of the key reasons involve money. Direct listings are cheaper, and if a company does not need capital to fund its operations, then it has little need to sell shares to the public using the IPO process. A direct listing bypasses the traditional gatekeepers of the financial markets such as investment banks.

But working with an investment bank is certainly no guarantee of success, and the high-profile IPO of Facebook in 2012 saw the stock decline precipitously before going on to good returns in later years. A company may be interested in a direct listing if it has a feature that would be less attractive to investors in the traditional IPO route. For example, two stocks that conducted a direct listing in recent years – Slack and Coinbase – both had a dual-share-class structure. This setup gives insiders a special class of stock, providing them many extra votes per share. In effect, this structure helps give insiders control of the company – a setup that many investors dislike. A direct listing also allows insiders to sell their stock immediately on the exchange without the lock-up of shares that is normal in the IPO process.

However, it seems the tide may be changing, as some venture capitalists are now starting to favour and recommend direct listings over IPOs. In this article, we will explain the differences between a direct listing and an initial public offering, and why VCs are beginning to have a preference. A company that’s going public typically has existing shareholders, including founders, employees, and early-stage investors.

• The popularity of direct listings has been curtailed by a listing rule limiting a company’s capital raise to the range stated on its registration statement.
• It is computed as the product of the total number of outstanding shares and the price of each share.
• Because of their use of an underwriter, who is professionally trained to assess risk, IPOs normally have prices that are appropriate to their level of risk.
• One of the key components of an IPO is the fact that shares are underwritten by an intermediary, and new shares are created for purchase.

Traditional and SPAC IPOs endured a dismal year in 2022, but a look back at past bear markets reveals that it was a fairly typical pullback. New rules for direct listings on US exchanges should make them more competitive with traditional IPOs going forward, placing traditional IPOs under additional pressure. With DPOs, there is an even playing field, with stocks being listed on the market for everyone to access and trade.

A special purpose acquisition company is a publicly traded company created for the purpose of acquiring or merging with an existing company. What it means to the average investor is that a DPO might not be heavily traded once it’s on the market, and so its price could have sharper swings up and down. When volume is light, prices typically must fall or rise more dramatically to find interested buyers and sellers.

A DPO may have a sponsoring FINRA broker, but the broker does not guarantee full subscription of the offering. In a DPO, the broker merely assures compliance with all applicable securities laws and assists with organizing the offering. DLs trace their short history back to April of 2018 when Spotify priced its initial public offering . Instead, Spotify pursued a novel approach where pre-IPO investors, including mostly venture capitalists and employees, offered shares to new investors using auction-based pricing. As a result, the company’s first day of trading was created with new institutional investors buying from private company investors. There are several benefits of a direct listing that attract companies to the process.