Direct listing vs IPO: how the two paths to public markets differ

A direct listing and a traditional IPO both end with a company's shares trading on a public exchange. From there, almost everything differs.

At a glance

| | Traditional IPO | Direct listing | |---|---|---| | Raises new capital? | Yes | Originally no; primary direct listings now allow it | | Underwritten? | Yes (firm-commitment) | No | | Price set by | Bookbuilding | Opening cross at the exchange | | Lockup | Standard 180-day | Often none | | Underwriting fees | Typically 7% (smaller for large deals) | None on the offering itself | | Liquidity for insiders on day one | Restricted by lockup | Usually unrestricted |

Why a company might choose a direct listing

• Already well known to investors, so the marketing apparatus of an IPO is less valuable.
• Strong balance sheet, no need for primary capital.
• Wants employees and pre-listing investors to be able to sell on day one.
• Wants to avoid IPO underpricing and underwriting fees.

Why a company might choose an IPO

• Needs to raise primary capital with price certainty.
• Wants the marketing and stabilization that come with a syndicate.
• Prefers controlled aftermarket trading via lockups.
• Has a complex investor narrative that benefits from a roadshow.

Notable direct listings

Spotify (2018), Slack (2019), Palantir (2020), Asana (2020), Coinbase (2021).

Hybrid: primary direct listing

In 2020 the SEC approved a structure that lets a company sell new primary shares as part of the opening cross. This narrows the gap between the two paths but has been used sparingly so far.