Pros & Cons of a Direct Listing vs. an IPO | ClickIPO

In late June 2019, cloud-based collaboration tool Slack (work) debuted on the New York Stock Exchange as a publicly traded company. however, the company did not take a traditional IPO route in which companies find an underwriter who will help raise funds for the IPO shares, find investors, and ultimately list on public markets. slack opted for a direct listing, meaning no new shares were sold to raise additional capital. spotify did this last year and it was successful, as a well-known company, there is more interest from investors. There are three main benefits and some potential pitfalls that businesses will see from doing a direct listing, like slack or spotify.

Pro: No Commissions In a traditional IPO, the publicly traded company has to pay a commission, typically 6 or 7 percent of the amount of capital raised by the underwriters. whereas, if the company is not raising additional capital, it does not have to pay this fee. the company will continue to pay a lower fee, typically 1 to 2 percent, to investment banks acting as advisers to the transaction.

Reading: Direct listing vs ipo pros and cons

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Advantage: No lock-in period When a company goes public through a traditional IPO, underwriters require a six-month lock-in period for certain members and major shareholders, which it means they have to wait until after the stock trades. for six months in the public domain before they can sell their shares. this can be a detriment to insiders. As an example, if a stock is priced at $20 and initially goes up to $25, but then goes down to $15 or $12, six months later, they lose the opportunity to sell at a higher price. therefore, one of the benefits of direct listing is that existing shareholders do not have to wait to sell their shares.

Advantage: Offers equal access A direct listing also provides a fairer market in which to participate from the start, because anyone, from the general public to institutions, can buy the shares at the same price. every time it opens for trading. With an initial public offering, the underwriters select who gets the share allocations, meaning they decide who gets to participate in the initial offering price. These investors tend to benefit from getting into the ground floor of a publicly traded company, often at a lower price than when it goes public. this problem is part of what we are trying to solve at clickipo, by creating access to ipos for all investors. Publicly traded companies can leverage our platform to provide access to the broader investor population, democratizing their IPO and putting shares in the hands of consumers who use their product, who are typically longer-term shareholders.

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Con: No new capital Generally, going public offers a great opportunity to raise money for the business, so companies miss out on that opportunity when they do a direct listing. if they needed capital in the future, they would lose this initial opportunity. however, companies that go direct generally do not need additional capital; for slack, this was not a problem.

Disadvantage: May be more volatile The other potentially negative aspect of a direct listing is that the initial trade may be more volatile because institutional buyers have not gone through a price discovery process to establish the initial IPO price. . With a traditional IPO, there is a bookmaking process in which major investors and institutions establish the value of a company at a certain price, creating a benchmark of what the company is worth before listing.

risk of investing in initial public offerings (“ipos”) there are specific risks when investing in an initial public offering (“ipo”). among other things, the share has not been subject to market valuation. those risks are fully described in the prospectus, and we recommend that you read the prospectus carefully to understand those risks before investing. An IPO is the first sale of shares by a private company to the public and may not be suitable for all investors. IPOs are often issued by smaller, younger companies looking for capital to expand, but so can large private companies looking to go public. Ipos are a risky investment. Even for experienced investors, it can be difficult to predict what the stock will do on its initial trading day and for the foreseeable future because there is often little historical data with which to analyze the company. furthermore, most IPOs are of companies going through a transitory period of growth, which are subject to additional uncertainty regarding their future values. Read more about the significant risks associated with investing in IPOs.

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