2020 Gives Rise to Another IPO Alternative: Direct Listings

By Jeff Bernstein

In the wake of the coronavirus pandemic, the IPO market may never look the same. The swift shift to virtual roadshows, for example, has demonstrated efficiencies that are likely to make digital alternatives stick even after regular business travel resumes. But beyond the operational changes behind preparing a company to go public, the market has seen growing interest in alternatives to the IPO itself.

As the market bounced back from its March lows and sectors like technology continued to rally, the IPO market has come back to life. A major factor behind the increased IPO activity has been a surge in special purpose acquisition companies (SPACs), which have so far raised more than $50 billion to date, due to attractive benefits over an IPO for some companies, such as expedited timelines, price certainty, and increased disclosure to investors. In addition, momentum continues to pick up for another IPO alternative: the direct listing. Here’s what companies need to know about a direct listing vs. IPO.

What Is a Direct Listing?

A direct listing is an alternative process to a traditional IPO that private companies can use to list on public stock exchanges. During this process, the company’s shares are listed on an exchange without a traditionally underwritten offering, and the price of the stock to buyers and sellers is not set by the underwriters, but determined by supply and demand. All or nearly all existing shareholders become free to sell all or a portion of their shares once the registration is declared effective, and a Direct Market Maker (DMM) engages in an order matching mechanism that creates a clearing price for the initial opening.

The Future of Direct Listings

Until late September, there have only been a select few companies that have pursued direct listings, but the path is becoming seen as a potentially simpler and, for some, superior alternative for private companies that want to provide liquidity to existing shareholders and employees. In August of this year, the SEC approved an NYSE proposal that will allow companies to issue new shares and raise primary capital through what is called a Primary Direct Floor Listing. While the plan has some deficiencies and is currently held up by the Council of Institutional Investors, this potential change could materially impact the number of companies that choose a direct listing vs. IPO or acquisition by a SPAC.

Direct Listing vs. IPO: How Do They Compare?

While it’s true direct listings simplify certain aspects of the IPO process, they also present a number of challenges, particularly around investor and research analyst education and marketing, especially as the investment banks are somewhat limited in their ability to interact with the investment community.

The mechanics behind direct listings differ from traditional IPOs and SPACs, but at their core, they carry the same primary objective: demonstrate value in order to build demand from investors. What is important for companies to understand are the nuances of direct listings that require a unique approach to building awareness and confidence with investors.

To help companies considering the public markets explore all their options, ICR published a Guide to Direct Listings  that details the benefits, challenges and mechanics of the process. With major differences including the lack of a traditional roadshow, forward-looking disclosure that will be included in SEC filings, and limits on the gathering of investor feedback, more creative solutions are needed in order to remain on offense when it comes to investor communications.

2020 has reinvented the IPO market, with more changes this year than over the past two decades. The level of excitement for newly listed companies is high, presenting a major opportunity for private companies exploring their public market potential. Direct listings are likely to grow in favor as they evolve, especially if companies are able to raise primary capital.  As companies explore the multiple avenues to becoming a public company, implementing best practices around communication with existing shareholders, sell-side analysts and institutional investors can make the difference between a failed or successful public company debut.

To read more about direct listings, download ICR’s guide.