Raising funds is the most important task for a business. It is equally necessary to choose to “go public” at the appropriate time. With so many businesses going public in the market, there are two ways to get money or capital through public listing- An initial public offering (IPO) or direct listing.
Although both processes can be used to publicly list a company, there is still a slight difference between a direct listing and an initial public offering, which is why some choose the one over the other in the IPO versus the direct listing process. .
Some businesses choose to go for an initial public offering, when new shares are produced and underwritten and then offered for sale to the general public. The other option is to go for direct listing where no new shares are issued; Only currently outstanding shares are sold. Let us discuss some of the major differences between the two.
purpose
One of the primary differences between direct listing and IPO is that a firm issues new shares of its stock through a typical IPO, whereas direct listing firms sell off their existing shares. Companies that pursue direct listings are usually not concerned with generating as much money, so they are not required to issue as many shares.
These businesses often choose the added benefit of going public, such as liquidity for existing shareholders, Future access to the public market for finance, or the prestige and visibility benefits that come with public company reporting.
cost
A direct listing costs significantly cheaper than an initial public offering because firms are not required to hire and pay underwriters for them. Instead, shareholders who already own commercial stock can sell those shares directly to the general public. Companies opting for a traditional IPO must pay underwriters for their services, who assist in the process of going public.
lock-in period
Companies can avoid the lock-in period by going direct. After a Standard IPOThere is often a window of time when current shareholders are unable to sell their stock on the open market. This keeps the market from becoming oversaturated, which can drive down the share price, and it also reassures potential new investors that existing investors aren’t just making quick money. Since the existing shareholders are selling their shares outright, there is obviously no lock-in period in direct listing.
research and support
Companies choosing to IPO must pay underwriters for their services, but they also get assistance from investment banks to advertise the stock and drive sales. Direct listings do not come with the same level of investment bank sales and marketing support, and companies must initiate external arrangements to obtain analyst research support.
audience
Direct listings do not involve an underwriter, thus businesses that go with this strategy must appeal to the public on their own. It often shows that companies are focused on their target market, have a strong and well-known brand, and have an understandable business plan. This can ensure that a large section of the financial community is aware of the business and is interested by buying shares.
By bypassing the underwriter’s requirement of an IPO, a firm can go public more quickly and effectively with a direct listing. However, since an IPO doesn’t have as much pricing with a company’s underwriting, it can make the stock more volatile when it starts.
Knowing the needs of the firm and how much it can handle is important when deciding between a direct listing and an IPO. For a company, both the initial public offering and the direct listing processes have their advantages and disadvantages.
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