Direct Listing, another way for companies to go public, is becoming popular in the U.S. stock market.
Direct Listings are far less common than traditional IPOs, and the only other notable companies that chose this way to go public are $Spotify Technology SA(SPOT.US)$ and $Slack Technologies Inc(WORK.US)$ before. In 2020, companies especially technology groups like $Palantir Technologies Inc(PLTR.US)$ and $Asana Inc(ASAN.US)$ go public this way.
Palantir COO: Direct listing was right for both employees and investors
Palantir Technologies, the secretive data company best known for taking on controversial work for the US government, opened for trading at $10 a share on September 30, 2020. The price was up from the reference price listed by the NYSE of $7.25 a share, which would have valued the company at nearly $16 billion.
The stock ends its first day at $9.73 while the valuation was $21 billion, on a huge trading volume of 335.5 million shares.
The decision to take the company public via a direct listing reflected the fact that the company did not need any primary capital.
-Palantir COO Shaym Sankar
What is Direct Listing?
Direct Listing, also called Direct Public Offering(DPO), is the way companies sell shares to the public directly, in which no new shares are created and only existing, outstanding shares are sold with no underwriters involved.
With traditional IPOs, companies need the services of intermediaries called underwriters, who facilitate the IPO process and charge a commission for their work. But with DPOs, companies can get rid of the help of these intermediaries in the process. Thus, for those who can't afford underwriters, don't want share dilution, or are avoiding lockup periods, DPOs are often better choices.
Advantages of Direct Listing
Saving a significant chunk of money that is usually paid to investment banks in a traditional IPO.
Helping companies avoid the indirect cost of selling the stocks at a discount with the market-determined price.
Providing liquidity for existing shareholders by allowing them to freely sell their shares in the public market, and lockup periods can be avoided.
Disadvantages of Direct Listing
No new funding is the biggest drawback in the past but now has been changed with the SEC's approval.
Potential for the First-Day volatility without a backstopping bank and a new base of big mutual-fund shareholders.
Good new: DPOs can raise money
In December 2020, SEC approved the NYSE's direct listing plan can raise new capital. Traditional IPOs are usually criticized for mispricing, especially in the process of those technology groups going public.
Many companies like $Snowflake Inc(SNOW.US)$ that have gone public in 2020 have seen their stock trade far above the set IPO price, meaning that the shares were not priced as high as they could have been, and money was left on the table.
Without question, Direct Listing is becoming appealing with the mechanism improvement.
Sources: CNBC, Barron's, WSJ, Investopedia