Direct Listings vs. Traditional IPOs, Explained
learn
basic

Direct Listings vs. Traditional IPOs, Explained

basic

3 min read

img

In August 2021, digital analytics company Amplitude filed for a direct listing in the US. What's that really mean? If you're eyeing public offerings, you ought to know the difference between direct listings and traditional IPOs.

What is a direct listing?

Direct listings (or direct public offerings) are when companies offer existing shares to the public without any intermediaries. By offering current stock, direct listing companies can bypass the lock-up period found in traditional IPOs, increasing liquidity for existing shareholders in a more cost-effective way.

Comparing direct listings to traditional IPOs

There are some fundamental differences between direct listings and traditional IPOs. For one thing, companies executing direct listings focus on the sales of existing shares in the company (owned by investors and employees) directly to the public, without intermediaries.

In traditional IPOs, companies focus on selling brand new shares in the company to raise initial capital.

Direct listings are not focused on raising additional capital and don’t require underwriters the way IPOs do. Using underwriters and selling new shares in an IPO increases the time and expense to go to market.

Unlike IPOs, direct listings also don’t have the lock-up periods, meaning a company's existing shareholders can sell shares in the public market off the bat. This means the stock's value could deflate quickly if existing shareholders get out of dodge.

While direct listings are common in the American markets, other regulators in different markets (like Saudi Arabia’s Capital Market Authority) are still figuring out whether direct listings can work for Arabic markets.

Why companies choose to take the direct listing path

The goals for companies who choose to do direct listings vs. traditional IPOs differ significantly. IPO-raised capital is usually used for R&D or expansion. Businesses that opt for direct listings are looking for other benefits, like increased liquidity for existing shareholders.

However, it’s important to note that companies going the direct listing route need to fit a particular profile. The company itself has to be well known and exciting for the market to invest in— typically consumer-facing with solid brand identities, sound business models, and profitable ventures.

Red flags to be aware of in direct listings

Be aware of possible red flags raised by companies doing direct listings. For example, Palantir (NASDAQ:PLTR) recently did a direct listing that raised some eyebrows:

  • Palantir c-suite execs have high compensation, accounting for a large chunk of losses.

  • The percentage of founder ownership is high and will be for a long time. The class of stock the founders have gives them a lot of control over the company's future.

  • Palantir has low customer concentration, meaning only three main customers make up a majority of revenue.

Famous examples of direct listings

Some notable examples of direct listings include:

  • Roblox (NYSE:RBLX)

  • Spotify (NYSE:SPOT)

  • Coinbase (NASDAQ:COIN)

  • Palantir (NYSE:PLTR)

Never miss a thing!

news and markets updates

* Terms apply

Raseed Invest Limited © 2021 - All Rights Reserved.

Raseed Invest Limited (“Raseed”) registered in the Dubai International Financial Centre (“DIFC”) and is regulated by the Dubai Financial Services Authority (“DFSA”) to conduct financial services “Arranging Deals in Investments” with a 'Retail' endorsement. Raseed does not provide any trading or investment advice and shall not be responsible for any loss arising from any investment based on any general information provided by Raseed or as may be available on Raseed’s website and other web-based services (collectively, the “Website Services). Raseed does not warrant that the information is accurate, reliable or complete or that the supply will be without interruptions. Any third party information provided through does not reflect the views of Raseed.

The content of the Website Services provided by Raseed is only intended to provide you with general information and is neither an offer to sell nor a solicitation of an offer to purchase any security and may not be relied upon for investment purposes. Any commentaries, articles, daily news items, public and/or private chat publications, stock analysis and/or other information contained in the Website Services should not be considered investment advice.

Raseed shall not be liable for any delay, inaccuracy, error or omission of any kind in the information provided by Raseed and/or any third party information provider or for any resulting loss or damage you may suffer as a result of or in connection with the information supplied by Raseed and/or any third party information provider. In addition, Raseed shall have no liability for any losses arising from unauthorized access to information or any other misuse of information.

Any opinions, news, research, analysis, prices, or other information contained on our Website Services or emailed to you are provided as general market commentary, and do not constitute investment advice. Raseed will not accept liability for any loss or damage, including, without limitation, for any loss of profit which may arise directly or indirectly from use of or reliance on such information. Each decision as to whether an investment is appropriate or proper, is an independent decision by you. You agree that Raseed has no fiduciary duty to you and is not responsible for any liabilities, claims, damages, costs and expenses, including attorneys’ fees, incurred in connection with you following Raseed’s generic investment information. Raseed makes no representations as to whether a particular investment is appropriate or suitable for you.


View important disclosures