Direct Listings vs. Initial Public Offerings (IPOs): What’s the Right for Your Company?

An ever-increasing number of startups and companies in California are opting for direct listings as an alternative to going public through an initial public offering (IPO). If you ask any business owner in California, “What is the hardest part of launching and running a company?” you will probably hear, “Raising capital.”

Once, IPOs were the only real option to grow a company and raise money for your business. However, in recent years, new trends have emerged, making direct listings a more viable option.

If you are not sure whether you should pass on initial public offerings and go the route of direct listings, consult with a legal and business expert. At Structure Law Group, our LA and Silicon Valley business lawyers give practical business advice to clients whether they are running a one-person business or a company that employs hundreds of employees.

Direct Listings vs. Initial Public Offerings (IPOs): What’s the Difference?

When deciding which one is the right option for your business and your particular circumstances, you need to understand the differences between direct listings and IPOs.

• The type of shares offered. A company can offer new and existing shares during an initial public offering, which can result in the reduction of the ownership proportion of current shareholders. By contrast, direct listings are a process in which a business can go public by selling the shares of existing shareholders, which does not dilute the value of the current shares.
• Buying shares. Once a company goes public through an initial public offering, the ability to buy IPO stocks depends on the investor’s brokerage. With direct listings, all investors get a chance to buy the company’s shares.
• The role of the investment bank. In IPOs, the investment bank plays the role of an intermediary between potential investors and the company offering shares. With direct listings, the investment bank is merely a financial advisor.
• Underwriting. Underwriters work for investment banks and help companies sell shares. Since there is no underwriting for direct listings because shares trade on a stock exchange, a company can save money.
• Setting the initial price of the shares. The initial price of the shares offered by a company is predetermined by both the company and the investment bank. With direct listings, a price is determined based on investor demand.

This is not the complete list of differences between direct listings and initial public offerings. Speak with a business expert to determine the best way to raise capital for your business in your particular situation.

How to Choose Between IPOs and Direct Listings?

According to University of Florida finance professor Jay Ritter, companies that go public via direct listing outperform the major broad indexes of the S&P 500 and initial public offering. Ritter told The Wall Street Journal that the share value of companies that went public using a direct listing rose over 64% compared to nearly 27% for IPO companies.

An increasing number of companies opt for a direct listing, but doing so requires them to consider several factors. It is essential to consult with a business expert to help you understand the benefits and risks of raising money through an IPO or direct listing.

Contact our LA and Silicon Valley business attorneys at Structure Law Group to determine the correct route for your company. Call (408) 441-7500 or send us an email to get a case evaluation.