Direct Listing Vs IPO: What’s the Difference?

There are two methods of raising money or capital through which companies can list the company’s shares for public exchange. Many businesses opt for an IPO, wherein new shares are underwritten, created, and sold to the general public. However, some businesses opt for a direct listing, where no new shares are created, and only the currently outstanding shares are sold without the involvement of underwriters.

A small number of companies decide to go with an IPO. Another choice is to list your company directly. Here we will go through some important differences between the two.

IPO

An Initial Public Offering (IPO) is the first sale of shares by a company to the public. A company usually hires an investment bank to help determine how many shares to sell, what price to sell them at, and market the IPO to potential investors. 

IPO listing often happens when a company grows rapidly and needs to raise money to fund its expansion. They can also be a way for a company’s founders and early investors to cash out some of their investment. 

Investors usually buy IPO shares hoping the company will be successful and the shares will increase in value. However, there is always a risk that the company will not do well, and the shares will decrease in value.

Mutual funds, investment banks, broker-dealers, and insurance firms make up their network. The firm and its underwriter participate in a “roadshow” before the IPO, during which the senior executives address institutional investors in an effort to generate enthusiasm for buying the soon-to-be-public shares.

Also Read: What is an IPO & Benefits to Invest in IPO in India?

Direct Listing

A Direct Public Offering (DPO) is a type of public offering where a company sells its shares directly to the public without using an intermediary such as an investment bank. 

Companies that wish to go public might not have the money to pay underwriters, might not want to create new shares that would dilute the existing ones, or might want to avoid lockup contracts. Companies with these worries frequently decide to move forward via direct listing instead of an IPO.

Direct Public Offerings can be a great way for companies to raise capital, but they come with some risks. The biggest risk is that the company might not meet its funding goals, leaving it without the capital it needs to grow. Another risk is that the share price could fluctuate wildly, depending on the demand from investors.

Difference between IPO and Direct Listing

Many people find it difficult to keep up with the ever-changing market and new developments. Therefore, being aware of the differences between direct listing and initial public offering is essential. 

Although either approach may accomplish the public listing of the firm, there is still little distinction between direct listing and initial public offering (IPO), which is why some investors choose it over others.

For starters, in a direct listing, a company sells its existing shares to the public, while in an IPO, a company issues new shares to the public. However, some corporations choose direct listing over an IPO when they wish to go public but lack the funding to pay for underwriting. This is a key factor in why many businesses choose DPO over an IPO.

Additionally, in a direct listing, no underwriter or syndicate of banks is involved. In contrast, in an IPO, an underwriter or syndicate typically helps sell the new shares to the public. 

In a direct listing, the price of the shares is set by the market, while in an IPO, the price is set by the underwriter.

Traditionally, the lockup period is required for companies going through the IPO process. In this situation, the company’s major shareholders are prohibited from selling their shares to the general public. This lockup duration is typically implemented in an IPO since it aids in avoiding the market’s significant supply, which lowers the stock value. 

On the other hand, with a direct public offering (DPO), existing shareholders may sell their shares shortly after the company goes public. Since no new shares were created, and the transaction process may only commence if the shareholders begin selling their shares, this is permitted under DPO.

Conclusion

By eliminating the underwriter needed in an IPO, a corporation can go public more quickly and effectively with a direct listing. Since there isn’t the same price determination as there is during the underwriting of a share in an IPO, this may cause the stock to trade with greater volatility. Knowing the needs of the company and its capacity to handle them is crucial when deciding between direct listing vs IPO. Both the process of an IPO and a direct public offering that leads to a company’s public listing have advantages and drawbacks. Therefore, you should select the most appropriate strategy for your firm after understanding the differences between direct listing and IPO.

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