Private enterprises can raise money by making their shares publicly available through an exchange listing. A common business listing method is through an IPO or initial public offering. However, another way out is choosing a direct listing.
Although intermediaries prefer using the IPO app over the share’s direct listing approach, both can aid a firm in raising funds. Before deciding which route to take, a company weighs the key differences between direct listing and IPO.
So, let’s learn what they are.
IPO: What Is It?
An intermediary creates and underwrites brand-new firm shares during an IPO. Throughout the IPO analysis process, the underwriter works closely with the firm to determine the first offer price of the shares.
The analysis helps them with regulatory procedures, purchase any available shares from the company, and then resell them to investors via their distribution networks. An efficient IPO app offers alerts to investors so that they can place their bids.
Direct Listing: What Is It?
A firm lists its shares on a stock exchange directly, sometimes referred to as a direct placement, by doing so without the assistance of an investment bank or other middleman.
Insiders sell their shares directly to the public via a direct listing, and the firm may also elect to sell stock to raise money. However, the Securities & Exchange Commission (SEC) didn’t start enabling businesses to acquire capital through direct listing until 2020.
Differences Between IPO & Direct Listing
IPO Vs Direct Listing: Goals & Objectives
It is the goal you set that lets you determine the right strategy. Due to their need for extra funding, startups and companies typically favor IPOs. The DL procedure is unique, though. Companies in this region do not want to raise new funds.
However, they intend to gain an edge from launching an IPO, such as higher liquidity, market recognition, and enhanced visibility.
IPO Vs Direct Listing: Costs
Comparatively less expensive than the original offering is the direct listing technique. In typical IPOs, companies must pay underwriters, advertising, and investment banks significant fees. However, since equities from current shareholders are sold directly to the public, the DL method is no longer necessary.
IPO Vs Direct Listing: Research
Companies that use DL must look outside their organization for support with things like research. However, because they hire underwriters, businesses choosing IP Offerings receive additional marketing support, which helps them increase stock sales.
IPO Vs Direct Listing: Lock-In Period
The direct listing has no lock-in period so that stockholders can sell their shares anytime. To avoid the market from being oversaturated, shareholders are often prohibited from selling their shares for a specific amount of time during traditional stock debuts. Stock prices typically decline when the market is oversaturated.
DPOs provide a less expensive option for share listing compared to IPOs. The listing guarantees that underwriters offer in IPOs are not available with a direct listing. Moreover, note the lesser price and volatility protection investors receive in direct listings when weighing the key features of direct listings vs. IPOs.
So, the distinction between an initial public offering (IPO) and a direct listing of shares affects both the listing choice of companies going public and the investments made by share buyers.
Which is riskier: IPO or Direct Listing?
Since the market determines the share price depending on supply and demand, direct listings can offer a more transparent and effective way for businesses to go public. However, because there is no price stability or lock-up period for current shareholders, direct listings can also be riskier than IPOs.
Is direct listing a more beneficial investment approach than IPO?
Investors don’t really care how the stock was brought to market; what matters is that they may purchase and sell it on the stock exchange with either approach.