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Direct Listing: How is it different from an IPO? MintGenie explains

The outlook is bullish for the rest of 2018 as well, with 50 companies—including HDFC Mutual Fund, Lodha Developers and Rail Vikas Nigam—expected to launch their IPOs. Photo: iStockphotoPremium
The outlook is bullish for the rest of 2018 as well, with 50 companies—including HDFC Mutual Fund, Lodha Developers and Rail Vikas Nigam—expected to launch their IPOs. Photo: iStockphoto

  • A direct listing or an IPO are the two methods for raising money or capital through a public listing. Making the right choice requires understanding of firm's requirements and its capacity. We go through every significant distinction between the two.

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The most important task for a business is raising money. Choosing how to "go public" at the appropriate time is equally essential. With so many businesses in the market becoming public, there are two ways to obtain funds or capital through public listing- an initial public offering (IPO) or a direct listing.

Although both procedures may be used to list a company publicly, there is still a little distinction between direct listing and initial public offering, which is why some choose one over the other in an IPO vs. direct listing process.

A few businesses choose to go for an initial public offering, when fresh shares are produced and underwritten and are then offered for sale to the general public. Other option is to go for direct listing where no new shares are issued; only currently outstanding shares are sold. Let us discuss some key distinctions between the two.

Objective

One of the primary distinctions between a direct listing and an IPO is that a firm issues new shares of its stock through a typical IPO, whereas direct listing firms simply sell their current shares. Companies that pursue direct listings typically aren't concerned with generating more money, so they don't need to issue more shares.

These businesses frequently choose the additional advantages of becoming public, such as liquidity for current shareholders, future access to the public market for finance, or the prestige and advantages of visibility that come with public company reporting.

Costs

A direct listing has significantly cheaper expenses than an initial public offering since firms do not need to hire and pay underwriters for them. Instead, shareholders who already own business stock may sell those shares directly to the general public. Companies that choose for traditional IPOs must pay underwriters, who aid in the process of going public, for their services.

Lock-in period

Companies can escape a lock-in period by going direct. Following a standard IPO, there 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 might drive down the share price, and it also reassures potential new investors that existing investors aren't just making a quick buck. Since current shareholders are selling their shares in whole, a direct listing obviously has no lock-in period.

Research and support

Companies that choose for IPOs must pay underwriters for their services, but they also get assistance from investment banks to advertise stock and increase sales. Direct listings do not come with the same level of investment bank sales and marketing assistance, and companies must initiate external arrangements to obtain analyst research support.

Audience

Direct listings don't include an underwriter, thus businesses that go with this strategy must appeal to the public on their own. This often signifies that companies are focused on their target market, have a strong and well-known brand, and have an understandable business plan. This can make sure that a larger segment of the financial community is aware of the business and intrigued by buying shares.

By bypassing the underwriter that an IPO requires, a firm can go public more quickly and effectively with a direct listing. However, since there isn't as much price determinism as there is with the underwriting of a company in an IPO, this may cause the stock to be more volatile when it begins trading.

Knowing the needs of the firm and how much it can handle is crucial when deciding between direct listing and an IPO. For a company, both the initial public offering and the direct listing processes have advantages and drawbacks of their own.

Follow MintGenie for more such stories. 

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