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Direct Listings What You Need To Know

December 05, 2019 16:05 PM UTC
- Updated September 02, 2020 11:49 AM UTC

It’s a different kind of IPO.

Transcript
[MUSIC PLAYING] The direct listing is a very specific way that a company can take itself public. Instead of hiring a bank, issuing new shares, and going through the entire elaborate IPO process, the company simply begins trading on a publicly-listed exchange, and it only sells existing shares. This is increasingly interesting to startups that have raised unlimited funds on the private market. So they don't need more money. And a lot of them already have established brands. They don't need to do the IPO as a branding process. So they're asking themselves, why should I pay all of these fees to a banker when I don't need a lot of the things that a traditional IPO gives me? I just want to provide liquidity to my existing shareholders. There's a lot of differences between a direct listing and an IPO. In a normal IPO, a company's CFO and their management team works with an investment bank to create a narrative, to figure out how many shares they're going to sell and to line up long-term institutional shareholders who will buy shares when the IPO happens. In a direct listing, none of that happens. The company will not be raising any new funds. Instead, they just start trading their existing shares on the public market. There are a lot of risks with a direct IPO, though. Not having any bankers involved means there's not going to be any one making sure that the company's stock stays level. There's not going to be any long-term shareholders smoothing out the first day of trading, ensuring that they have a nice healthy pop when they go public. It could be a very volatile IPO. There's not going to be a lot of liquidity, and the stock could immediately tank or immediately spike. Direct closings are extremely rare. Usually, there's going to be a handful a year, and they're typically done by extremely small companies in the biotech and life sciences industries, usually $10 to $15 million.